The Ponderings of Woodrow

Why today mattered...

Today I am struck by the complexity of our lives.

This morning, my wife gave birth to our 3rd son; and both mommy and son are healthy and happy as I write this. As I sat holding my newborn son, most likely our last, I was overwhelmed by a feeling of gratification. Gratification that I have a wife who supports and understands me, and who so beautifully and intelligently serves as the foundation of our family. Gratification for three healthy children. Gratification that I'm fortunate enough to have the means to support them in a way that will provide them with every opportunity. Gratification for the overwhelming support my colleagues and friends show me every single day.

My personal gratification was counterbalanced by the historic nature of today's inaugural festivities. To see millions of Americans descend upon the Capitol to show support for President Obama, to see the hope for great change physically manifested in a wave of citizens as diverse in ethnicity, age, sexual orientation and personal beliefs, was a powerful thing. And certainly President Obama delivered a speech worthy of his standing as an accomplished orator.

...So let us mark this day with remembrance, of who we are and how far we have traveled. In the year of America's birth, in the coldest of months, a small band of patriots huddled by dying campfires on the shores of an icy river. The capital was abandoned. The enemy was advancing. The snow was stained with blood. At a moment when the outcome of our revolution was most in doubt, the father of our nation ordered these words be read to the people:

"Let it be told to the future world...that in the depth of winter, when nothing but hope and virtue could survive ... that the city and the country, alarmed at one common danger, came forth to meet [it]."

America. In the face of our common dangers, in this winter of our hardship, let us remember these timeless words. With hope and virtue, let us brave once more the icy currents, and endure what storms may come. Let it be said by our children's children that when we were tested we refused to let this journey end, that we did not turn back nor did we falter; and with eyes fixed on the horizon and God's grace upon us, we carried forth that great gift of freedom and delivered it safely to future generations.

But I couldn't help and think about the exorbitant costs being incurred, well north of $150mm according to the latest tally. Was today historically significant? Yes. Did we deserve a day to celebrate all that's still great about our nation? Certainly. But isn't there something obscene about spending $150mm on pomp and circumstance at a time when our nation is at its most precarious in generations? My friend Howard Lindzon said it best:

It would have been a great idea to therefore cancel the first, biggest and dumbest party of the administration for an "America has a surplus party" one or two years out if all goes well.

We are the Capital One Society. Pleasure now.

I have seen zilch that shows me we are willing to push off the "pleasure now" philosophy from our new President. Even if he talks about it tonight, he sure wont be taken seriously buy me.

Color me skeptical.

And then on top of all that, I see the market by which I make my living completely give up the goat. I've never before felt so unhappy to be right about the way things are going, and where I fear they're continuing to head. Today's market action was negative on many levels, another day of indiscriminate selling across all sectors, caps, valuations and relative fundamentals. We broke key technical support levels and saw the financials lead the way down. Even the most balanced market prognosticators understand that financials need to find their bottom before the market can begin to heal; and yet we saw carnage in the sector today: Bank of America (BAC) down 29%, Citigroup (C) down 20%, J.P. Morgan (JPM) down 21%, Wells Fargo (WFC) down 24%. Even State Street (STT), thought to be a relative safe haven in the sector, lost almost 60% of its value as problems in its commercial paper business may necessitate a capital infusion. With each passing day more people realize the crutches and cliches that helped make their investing careers are just that, crutches and cliches that fail to support Mr. Market when we're in unprecedented times.

So as I get ready to call it a night I'm left thinking about the complexity of perspective, and wonder if tomorrow will prove any less conflicting.

Disclaimer: At the time of writing, neither the author nor the firms affiliated with the author maintained a position, long or short, in the publicly traded companies mentioned or any related instruments. The author and the firm reserve the right to alter their investment positions at any time in the future. The content on this site is provided as general information only and should not be taken as investment advice. Content should not serve in any way as a recommendation to buy or sell any security or financial instrument, or to participate in any particular trading or investment strategy. The ideas expressed on this site are solely the opinions of the author(s) and do not necessarily represent the opinions of firms affiliated with the author. Any action taken as a result of information or analysis on this blog is ultimately your responsibility. Consult your investment adviser before making any investment decisions.

Great Google-y Moogly!

If I hear "may we live in interesting times" from one more person...

For investors involved with Google [GOOG], today was indeed memorable. Like many tech bellwethers, Google was slammed in Monday's carnage. Today, in the uber relief rally, Google shares were humming along and regaining much of the losses from Monday. That is, until the closing bell.

Volatility, thy name is Google
One moment Google appears to be trading comfortably above $400 per share, and then, in the final minutes of the day we saw prints as low as $212.63 and as high $483.63; with the closing price as $341.

HUH? Excuse me?
Within seconds of the closing print, my head trader called my office to explain what transpired. He had warned us the day before that with the quarter end, the liquidity crisis and the historic volatility we should expect quite a few odd trades particularly on the opens and closes. While I recall the warning, I certainly didn't expect a 16% swing in a matter of minutes!

Why the closing price matters
Within moments of the closing price, it was clear something was amiss. In after hours trading, Google was trading comfortably above $400 [at $405 or so when I first took a gander]. So that might lead you to ask, so what was the big deal?

Well, as money managers know full well, the closing price matters, PARTICULARLY the closing price at quarter end. Most funds report results in some fashion on a monthly basis, and quarterly filings are required of all registered funds. This was both a month end AND the end of Q3. And this was GOOG, a stock that just about anyone involved in technology investing has at least some exposure to.

Had funds been forced to accept the closing price of $341 today, a number of issues would've been at play:

• Management fees -- Funds that charge management fees [i.e., almost all of them] generally take their fees on the 1st day of every quarter. So if you had a large position in Google, it was possible that the $341 print could've cost your fund a substantial amount of cash flow. For example, let's say you're running a $1B hedge fund that charges a 2% annual management fee. You are long 125,000 shares [roughly a 5% long position]. The difference between the legitimate closing price ($400.52) and the reported closing price ($341) or roughly $60 per share equates to a difference in ending equity of $7.5mm. The quarterly allocation of a 2% management fee (i.e., 0.5%) would be $37,500. Might not seem like much, but $37,500 in lost cash flow is meaningful for any business.
• Reported returns -- Month- and quarter-end returns would've been skewed. In the same example (125,000 share long of GOOG), this would've cost a fund as much as 75 basis points of reported returns. That's a big number, particularly for a volatile month where the majority of funds likely reported losses anyway.
• Skewed basis for capital inflows -- Depending on whether a fund was due for capital inflows at the start of the month, this would serve to unfairly skew the cost bases for existing clients if you initiated a buying program for the new capital at the October 1st stock price.
• Skewed basis for redemptions -- The inverse of the above. Investors taking money out as of September 1st would've had their returns understated. 

Luckily, all of this turned out to be in error. Our trader sent me the following notification after this whole debacle unfolded:

Pursuant to Rule 11890(b) NASDAQ, on its own motion, has determined to cancel all trades in security Google Inc Cl - A "GOOG" at or above $425.29 and at or below $400.52 that were executed in NASDAQ between 15:57:00 and 16:02:00 ET. In addition, NASDAQ will be adjusting the NASDAQ Official Closing Cross (NOCP) and all trades executed in the cross to $400.52. This decision cannot be appealed. MarketWatch has coordinated this decision to break trades with other UTP Exchanges. NASDAQ will be canceling trades on the participant’s behalf.

Interesting times indeed.

Disclaimer: At the time of writing, the author and/or the firms affiliated with the author maintained a long equity position in Google [GOOG]. The author and the firm reserve the right to alter their investment positions at any time in the future. The content on this site is provided as general information only and should not be taken as investment advice. Content should not serve in any way as a recommendation to buy or sell any security or financial instrument, or to participate in any particular trading or investment strategy. The ideas expressed on this site are solely the opinions of the author(s) and do not necessarily represent the opinions of firms affiliated with the author. Any action taken as a result of information or analysis on this blog is ultimately your responsibility. Consult your investment adviser before making any investment decisions.

Hedge Fund fallout just getting started?

Nouriel Roubini, not too long ago considered an alarmist by many, has been so right (while so many were wrong) that his missives are quickly becoming must reads by anyone even tangentially involved in the capital markets.

In today's Financial Times, Roubini discusses what he sees as the "next step" [free registration required] in the global unraveling of the "shadow banking system":

...The next stage will be a run on thousands of highly leveraged hedge funds. After a brief lock-up period, investors in such funds can redeem their investments on a quarterly basis; thus a bank-like run on hedge funds is highly possible. Hundreds of smaller, younger funds that have taken excessive risks with high leverage and are poorly managed may collapse. A massive shake-out of the bloated hedge fund industry is likely in the next two years.

A Global Process of Deleveraging

Easy money. At the heart of our current financial crisis is a systemic disregard for risk which in turn fueled an asinine bubble in worldwide liquidity. The availability of easy money stemmed every rung of the economic ladder. Consumers got easy car loans, homeowners got easy mortgages, corporations fueled M&A and buybacks with easy debt, MEW was plentiful, historic LBOs, unprecedented money growth in emerging and developed sovereign nations. You name it, the liquidity was there. The notion of "what goes up must come down" is more than a truism in this case. While we're beginning to understand the significance of the mess we've collectively made, anyone that thinks the Paulson Plan magically gets us through the normalization process needs to revisit their statistics textbooks from university.

Felix Zulauf explained the situation succinctly in this week's Barron's [sub required]:

The leveraging-up in this cycle is reversing, and we are now deleveraging. When a huge system -- that is, the global credit system dominated by the investment-bank giants that have been the major creators of credit in the last cycle -- turns down, the fallout is going to be terrible. Deleveraging is a very painful process, and will run longer and deeper than anybody can imagine.

Quantifying Hedge Fund Leverage

The hedge fund industry has grown up during the liquidity bubble. That's no coincidence. I've had a number of people ask me what the "typical" leverage profile is within the industry. A recent study by the ECB puts the average hedge fund leverage at 1.4x-1.5x in its most recent analysis; with the caveat that leverage was declining in the face of tighter credit conditions. Unfortunately, even if this number proved accurate, knowing the Mean for our industry isn't very helpful in estimating the potential fallout that Roubini predicts.

1. Hedge funds are fluid instruments and a snapshot is just that, a snapshot. Industry leverage can change dramatically in a matter of weeks. Quarter to quarter is anyone's guess
2. The mean isn't predictive given the dispersion of styles and risk characteristics within our industry. There are funds that use little to no leverage, and there are firms that use 10-12x leverage [think Bear Stearns Enhanced Leverage Fund]
3. The majority of funds are unregistered and unregulated, creating an opacity of disclosure

But Wait, There's More...

1.5x leverage doesn't seem as bad as you thought, right? Well that only accounts for a component of the unwinding Roubini is hinting at. A good chunk of hedge fund capital comes from fund of funds; which use leverage to generate their returns. Still not enough for you? Then remember that lots of hedge funds used that capital to invest in highly leveraged debt instruments (i.e., CDOs).

Way back in January 2007, Gillian Tett of the Financial Times [sub required] relayed a story from an anonymous emailer who expressed disbelief at the ease by which hedge funds have been able to lever up as much at 50:1 [admittedly an extreme example]:

He then relates the case of a typical hedge fund, two times levered. That looks modest until you realise it is partly backed by fund of funds' money (which is three times levered) and investing in deeply subordinated tranches of collateralised debt obligations, which are nine times levered. "Thus every €1m of CDO bonds [acquired] is effectively supported by less than €20,000 of end investors' capital - a 2% price decline in the CDO paper wipes out the capital supporting it.

"The degree of leverage at work . . . is quite frankly frightening," he concludes. "Very few hedge funds I talk to have got a prayer in the next downturn. Even more worryingly, most of them don't even expect one."

Don't Cry for Me Argentina

Right now the "Main Street vs. Wall Street" sentiment is at a fever pitch and, for as little sympathy the average citzen has for the travails of Lehman, AIG, Goldman, Morgan Stanley, et al...you can be sure they have less sympathy for the hedge fund industry. We're big boys (and girls) and the rational among us can't reasonably expect the kind of blank check bail outs being afforded the investment banks, insurers and traditional lenders.

• Unregulated = Unprotected -- The pound of flesh the government is demanding for this monster bail out is HEAVY REGULATION; and as an industry we've fought continuously against oversight. Ironically, if the HF fallout is severe enough, we're probably facing increased regulation when all is said and done anyway.
• Easy Political Targets -- The blame game is already underway. While I personally think it's counter productive to spend cycles figuring out who to blame [especially b/c just about everyone is culpable in a mess of this magnitude], it's an ELECTION YEAR and politicians need someone to rally against. Since they can't blame over-leveraged consumers [they need those votes] and assuredly won't blame themselves [how can they win re-election that way?], hedge funds are an easy target.
• Short-selling criticism is a harbinger -- I've already said my piece on the silliness of the short-selling ban; but that isn't stopping the politicians from beating the "short selling = evil" drum.

Drowning in High Water

Deleveraging and public criticism are just two of the issues at play right now. The proverbial other shoe to drop is the incentive allocation model. For those who aren't familiar with how hedge funds are structured, typically we collect a management fee (based on a percentage of assets under management) and a performance fee (based on a defined percentage of the net profits during a given fiscal period). But what happens when a fund manager fails to generate a positive return? We're subject to a high water mark:

EurekaHedge FAQ:
What is a high water mark?

Where a hedge fund applies a high water mark to an investor's money, this means that the manager will only receive performance fees, on that particular pool of invested money, when its value is greater than its previous greatest value. Should the investment drop in value then the manager must bring it back above the previous greatest value before they can receive performance fees again.

In other words, if a fund loses 10% in Year N, it has to make back that 10% in Year N+1 before it can begin accruing performance fees.

Nine of out Ten Hedge Funds are Under Water

According to a recent survey by EurekaHedge, 97% of the 4,000 funds it surveyed were under their high water mark as of July 31st. That shouldn't be a surprise given where the equity indices currently sit, but it does raise the question of what the resulting impact will be. Barring a major turnaround in the capital markets between now and year end, the majority of the world's hedge funds won't receive performance fees.

Thoughts on the potential fallout:

• Large, multi-strategy mega funds will weather the storm better than most -- The mega funds are diversified and well capitalized to weather a down year or two. Presuming the aggrerate returns aren't significantly below the high water mark, the potential to quickly get back above water in 2009 will be incentive. Furthermore, top performers at smaller funds will likely look upon the relative safety of working for a mega firm in a new light
• Hundreds, if not thousands of funds will shut down, merge or recapitalize -- Some fund managers will simply close their doors and move onto other initiatives; returning capital to LPs and living off their past proceeds. Others will look to "get big quickly." Expect many funds that fall significantly under water to lose top performers who would have otherwise generated performance fees on their own portion of the portfolio
• Capital raising will become more difficult -- This is already happening but capital raising will become more difficult; particularly as fund of funds and large institutions struggle to justify past investments in toxic CDOs and other leveraged, non-performing assets
• Investors will demand more transparency -- This is self explanatory, and inevitable
• Aggregate returns will moderate -- Systemic deleveraging means more muted aggregate returns. For funds that have made their way using little to no leverage [full disclosure: we are one of those entities], this hopefully brings opportunity

Tumultuous times are ahead, for every portion of the financial world. Roubini's prediction that hedge funds have a period of rationalization ahead is both logical and highly likely. There will be pain; much of it necessary. But those who stay focused on the task at hand, execute within their stated investment parameters, and balance the need for absolute returns with the need to service and protect their partners against undue risk will not only survive, but flourish. Changes are inevitable, but I for one don't necessarily think that's a bad thing -- longer term, of course.

Disclaimer: The content on this site is provided as general information only and should not be taken as investment advice. Content should not serve in any way as a recommendation to buy or sell any security or financial instrument, or to participate in any particular trading or investment strategy. The ideas expressed on this site are solely the opinions of the author(s) and do not necessarily represent the opinions of firms affiliated with the author. Any action taken as a result of information or analysis on this blog is ultimately your responsibility. Consult your investment adviser before making any investment decisions.

VC is to Optimism as Public Equity is to...

Last week, I had the chance to catch up with Brad Feld over lunch while he was camped out at Union Square Ventures. It was great to finally sit down and chat with Brad face to face, as we'd played "email tag" far too often in recent months. We missed each other when I was in Boulder in March, and then I couldn't get free in July when he was last in the city.

Alas, good things come to those who wait and we riffed about myriad topics in between bites of delicious sandwiches at 'wichcraft. One of the topics we touched on was a recent post Brad made on AskTheVC:

Q: What is the one common element you’ve seen in successful VC’s?

A: (Brad) This is an easy one.  Before the snarky ones in the crowd answer “nothing”, I’d suggest that its “optimism.” I have yet to meet a successful VC that isn’t optimistic about the future and the companies he is involved in.  I particularly like the Wikipedia description of optimism, which is “the overarching mental state wherein people believe that things will more likely go well for them than go badly.”

We were in agreement that Optimism is a quality universally required by successful venture capitalists. But what about public equity investors like yours truly? Is SKEPTICISM the appropriate analog for public equity investors?

From Merriam-Webster:

Skepticism

skep·ti·cism

Pronunciation:

      \ˈskep-tə-ˌsi-zəm\    

2 a: the doctrine that true knowledge or knowledge in a particular area is uncertain b: the method of suspended judgment, systematic doubt, or criticism characteristic of skeptics

There is certainly an argument to be made for skepticism as a necessary trait of successful public equity investors. Company management will always tell you things are going great, until they're not. The next time a management team signals problems BEFORE a thoughtful analysis of the fundamentals warns us will be the first. Aspire for the best, but prepare yourself for the worst.

But the more I think about the idea the less convinced I am that skepticism, by itself, fits the bill. I also think successful public equity investing requires pragmatism, decisiveness and circumspection.

What do you think? And what qualities do you believe all investors share? I can think of many qualities that successful venture, private equity and public equity investors have in common.

bradfeld vc optimism traits skepticism investing publicequity woodrow enterprise irregulars 

Rick Sherlund sets sail on a Galleon [Group, that is]...

Rick Sherlund's tenure as a sell-side research analyst has finally come to a close, and with it the last vestiges of a bygone era.  We've known for months that Sherlund was looking toward opportunities on the buy-side and today it was publicly announced that he'll be joining the Galleon Group as a managing director tasked with investing in a portfolio of software stocks.

Galleon Group is a well-known NY-based hedge fund group focused primarily on information technology and health care investments. The fund was started back in the early 90s by Raj Rajaratnam while he was a rising star at Needham. After a few years of running the fund inside of Needham while also serving as the investment bank's President, he bought the fund from Needham and went out on his own. Galleon started in 1997 with approximately $350mm and now stands north of $6.5 billion.

Will Sherlund flourish in his new role?  Time will tell.  Both my partner David and I were sell-side research analysts prior to becoming money managers; and I can say without hesitation that they're far less correlated than one might suspect. That said, Sherlund is joining an established fund with infrastructure and processes well in place. He doesn't have to go through the rigmarole of starting  his own fund and all the trappings involved [e.g., fund-raising, marketing, hiring a staff, legal & compliance].

As I said a few months ago, in many ways this signals the end of an era.

Here's to good sailing.

sherlund goldman sachs sell-side software woodrow buy-side investing galleon

Bill Miller on the end of "the Streak"...

On a day when two of the industry's silliest personalities are slinging arrows at one another, I wanted to call your attention to an investor that actually deserves some recognition. Unlike Jim "Mad Money" Cramer and Henry "Internet Bubble" Blodget, Bill Miller has actually proven himself to be a sterling investor; one of the industry's best.

For those who don't know Miller, his $21B Legg Mason Value Trust (LMVTX) fund had beaten the S&P 500 return for FIFTEEN (15) consecutive years until he fell short of the mark in 2006. This streak is absolutely astounding and one that's made Bill respected throughout the industry.

Miller addressed the end of his streak in his quarterly newsletter and it's a fantastic read.

...On failure

Active managers are paid to add value over what can be earned at low cost from passive investing, and failure to do that is failure. We underperformed the S&P 500 in 2006 and did not add value for our clients and shareholders. It is little consolation that most mutual fund managers failed to beat the index in 2006, or that most managers of US large- capitalization stocks fail to outperform in most years, or that under 25% of them can outperform over long periods such as 10 years, or that the next longest streak among active managers going into 2006 - 8 years - also ended this year, or that it is believed that no one else has outperformed for 15 consecutive calendar years.(1) We are paid to do a job and we didn't do it this year, which is what the end of the streak means, and I am not at all happy or relieved about that.

It's very easy to want to make excuses when you fall short of your benchmark, and Miller has built up enough goodwill to simply say "we'll get them next year." Yet, he's set an expectation of excellence for himself and his team that makes excuses unacceptable.

...On luck

There was, of course, a lot of luck involved in the streak...What are the chances it was 100% luck? There are two broad ways to look at it, one involving a priori, and the other a posteriori, probabilities. If beating the market was purely random, like tossing a coin, then the odds of 15 consecutive years of beating it would be the same as the odds of tossing heads 15 times in a row: 1 in 215, or 1 in 32,768. Using the actual probabilities of beating the market in each of the years from 1991 to 2005 makes the number 1 in 2.3 million. So there was probably some skill involved. On the other hand, something with odds of 1 in 2.3 million happens to about 130 people per day in the US, so you never know.

...On the definition of value investing

Analytically, we are value investors and our securities are chosen based on our assessment of intrinsic business value. Intrinsic business value is the present value of the future free cash flows of the business.     I want to stress that is THE definition of value, not MY definition of value...

...Trying to figure out the present value of the future free cash flows of a business involves a high degree of estimation error, and is highly sensitive to inputs, which is why we use every valuation methodology known to assess business value, and don't just do discounted cash flow analysis. We pay a great deal of attention to factors that historically have correlated with stock outperformance, such as free cash flow yield and significant stock repurchase activity. It all eventually comes down to expectations. Whether a company's valuation looks low or high, if it is going to outperform, the market will have to revise its expectations upward.

While Miller's observations relate to his take on value investing, his conclusions hold true for growth oriented investors, too. As any technology investor can attest, a company's stock performance is often as much about the direction of expectations [most commonly expressed as the direction of revenue, cash flow and earnings estimates] as anything else.

...On taking advantage of long-term trends in a short-term world

It is trying to invest long-term in a short-term world, and being contrarian when conformity is more comfortable, and being willing to court controversy and be wrong, that has helped us outperform. "Don't you read the papers?" one exasperated client asked us after we bought a stock that was embroiled in scandal. As I also like to remind our analysts, if it's in the papers, it's in the price. The market does reflect the available information, as the professors tell us. But just as the funhouse mirrors don't always accurately reflect your weight, the markets don't always accurately reflect that information. Usually they are too pessimistic when it is bad, and too optimistic when it is good.

The market is extremely efficient, and trends including globalization, increased use of derivatives, more advanced trading algorithms and advancements in technology have all helped to further remove short-term arbitrage opportunities. Finding the long-term signals amid the cacophony of short-term noise is one of the few ways to sustainably outperform, in my opinion.

...On the importance of factor diversification

A key reason for the streak has been our factor diversification. By that I mean we own a mix of companies whose fundamental valuation factors differ. We have high PE and low PE, high price-to-book and low price-to-book. Most investors tend to be relatively undiversifed with respect to these valuation factors, with traditional value investors clustered in low valuations, and growth investors in high valuations. For most of the 1980s and early 1990s we did the same, and got the same results: when so-called value did well, typically from the bottom of a recession to the peak of the economic cycle, so did we. And when growth did well, again usually as the economy was slowing and growth was harder to come by, we did poorly, along with other value types.

It's very difficult to comfortably own stocks across multiple factors; because it requires one to have equal confidence in a myriad of valuation methodologies.  Where this really falls apart is when the chips are down. If you have made most of your money as a growth investor, it's only natural that any "value" investment you've made is going to have a shorter leash. You're going to lack conviction.

...On the fallacy of naive concentration

It has been wrongly suggested that concentration, owning fewer rather than many stocks, is a strategy that adds value. Studies have shown that concentrated portfolios typically outperform others. All true, but an example of what Michael Mauboussin would call attribute-based thinking. The real issue is the circumstances in which concentration pays, not whether it has in the past.

...Concentration works when the market has what the academics call fat tails, or in more common parlance, big opportunities. If I am considering buying three $10 stocks, two of which I think are worth $15, and the third worth $50, then I will buy the one worth $50, since my expected return would be diminished by splitting the money among the three. But if I think all are worth $15, then I should buy all three, since my risk is then lowered by spreading it around. For much of the past 25 years, there were those $10 stocks worth $50 around. For the past few years, they have been largely absent, as inter-industry valuations have only been this homogeneous about 2% of the time.

If you haven't guessed by now, I have an immense amount of respect for Bill Miller and think his partner letter should serve as a lesson to investors everywhere. Maintain an investment discipline, but never stop re-evaluating yourself and your methodologies. Don't make excuses, find answers. Understand what's working, what's not and how much of that relates to factors you can actively manage. Thanks for the lessons Bill, not get back to work starting a new streak.

bill miller legg mason partner letter investing active management seeking alpha woodrow

Reuters launches tagging service...

Algorithmic trading makes up an ever-increasing component of the equity trade volume. Aite Consulting estimates that machine-based, algorithmic trading will comprise 1/3rd of all U.S. equity trade volumes this year, growing to more than 50% by 2010. There are many reasons for this trend:

• Decimalization
• More sophisticated algorithms and back-testing methods
• Availability of massive computing storage and processing power at fractional costs
• Bifurcation of alpha vs. beta generation strategies

In any event, whether you agree with Aite group's estimate or not, algorithmic trading is certainly on the rise and will continue to become more sophisticated as large institutions and firms with high trading volumes search for ways to optimize performance.

Today, Reuters announced two services that, over time, could fundamentally change the way algorithmic trading occurs; and in fact it may help bridge the gap between the pure quant models that dominate algorithmic trading now with the more traditional, bottoms-up fundamental analysis that many active fund managers (my partners and I included) utilize.

Reuters, the global information behemoth, has launched two services, Reuters NewsScope Real-Time and Reuters NewsScope Archive that, together, are an important step in making unstructured textual information usable in a machine oriented quant model.

As an advocate of social software, and the power of services like Digg, del.icio.us, Technorati and others, seeing a major source of financial news embrace metadata and contextual tagging at such a core level is wildly exciting.

reuters algorithmic trading newsscope quant tagging metadata metatagging fundamental emergent applications social software investing active versus passive woodrow