Friday, April 28, 2006

Information blackout

Wow, I think I just went an entire week without posting anything. In the last week I've been down to Robot Genius world headquarters (with a stop on Sand Hill road for some meetings), changed a million diapers, covered for a colleague in undergrad QM (four lectures on scattering theory), almost finished a physics paper (I'll post something here when it's ready), given a talk on entrepreneurism at the UO Lundquist School of Business, and next week I'm giving a physics colloquium at U Kansas. Did I mention I changed a lot of diapers? Boy am I tired...

I heard the following story about Sabeer Bhatia, Caltech grad and founder of Hotmail. Apparently Sabeer was seeking funding for another startup idea, got turned down, and as he was leaving the office the VC said something like "Gee, you're a smart guy, Sabeer, do you have any other ideas?" Sabeer replied that he really wished he could check his email via a simple Web interface so he didn't have to wait until he got home. Thus Hotmail, a $400M Microsoft acquisition was born.

Thursday, April 20, 2006

Alpha geeks

More nonlinear returns to brainpower.

This Times article, about Google in China, features Kai-Fu Lee, a CS PhD (speech recognition) who was the subject of a bidding war and lawsuits between Microsoft and Google. He now runs Google's Beijing office (he used to run Microsoft research there).

This WSJ piece profiles Goldman's Global Alpha quant hedge fund. Asness has appeared before on this blog (you can search on the right), both for his research on a modified Fed model for equity valuation, and via a Times magazine profile.
In early 1997, Mark Carhart was an academic at the University of Southern California. His big claim to fame was his doctorate work at the University of Chicago on mutual-fund performance.

Today, the 40-year-old Mr. Carhart and another former Chicago-school colleague run a big, secretive hedge fund at Goldman Sachs Group Inc. which, with an estimated $10 billion in assets, is the Cadillac of a fleet of alternative investments that have boosted the earnings at the blue-chip Wall Street firm. And the two men are making millions themselves.

Known as Global Alpha, the Goldman hedge fund was a leading contributor to a surge in "incentive fees," or performance-related fees, that Goldman reported for the first quarter ended in February. In that period, the incentive fees soared to $739 million from $131 million a year earlier, helping Goldman's earnings rise 64% to $2.48 billion, the biggest first-quarter gain of any major Wall Street firm.

Global Alpha's recent returns have been sizzling. In the 12-month period ended in March, the fund returned more than 48% before some fees, according to Goldman Sachs JBWere, an Australian affiliate of Goldman. It was closed to new investors last year. (On Wall Street, the word alpha refers to investment returns beyond those generated by the market.)

The bearded Mr. Carhart and his colleague, Ray Iwanowski, manage Global Alpha. A 50-member team they lead also offers a menu of services for Goldman clients based on statistical models first developed by a group led by Clifford Asness, another former Chicago student.

The Global Alpha fund was seeded in late 1995 with just $10 million, and in its first full year, 1996, the fund returned 140%, one former group member recalls. Mr. Asness left Goldman in 1997 with seven of the group's 13 members, to form his own hedge-fund business, AQR -- short for Applied Quantitative Research.

...The Global Alpha group's lineage traces to a group of students of Professor Eugene Fama, an influential Chicago finance professor known for a belief in efficient markets. In the early 1990s, his former teaching assistant, Mr. Asness, was recruited to join Goldman by a college friend, and in turn recruited numerous colleagues from Chicago.

One of the group's early assignments was to build quantitatively oriented asset-allocation models. Part of the methodology, which underpinned the strategy of Global Alpha, was to select stocks selling at cheap prices based on their book value, earnings or other metrics, while betting on a decline in stocks selling at higher prices based on their growth prospects.

The Goldman group later used similar methods to choose not only stocks but also bonds, currencies, and entire country markets, former group members say. The models also included a "momentum" factor based on which stocks or markets have recently performed well. Although the models have evolved, the underlying "quant" methodology remains similar.

In addition to Global Alpha, Goldman employees manage two other hedge funds specializing in quantitative stock and bond investments with an estimated $8 billion in assets. While some competitors grumble that Goldman traders could gain an advantage based on possible access to client information, the Goldman funds don't have such access, former group members say.

The Goldman "quants" also offer a product similar to the Global Alpha fund known as global tactical asset allocation, which gives pension funds and other institutions the chance to boost returns using statistical methods. Goldman's 2003 annual report featured a team including Mr. Carhart which invested $1 billion for the General Motors Corp. pension fund using "active alpha investing."

The Goldman team continues to rely on the latest work from academia. Maryland's Mr. Wermers recalled a visit to Goldman about a year ago to discuss a paper he had written on whether the flow of investments into top-performing mutual funds could predict whether stocks they held would rise in price.

When he presented his findings in a boardroom filled with about 20 GSAM employees, Mr. Wermers recalls, "it was kind of a high-pressure event. They asked very, very tough questions."

Monday, April 17, 2006

Saturday, April 15, 2006

Rising inequality in Japan

Maximum marginal tax rates in Japan are now comparable to those in the US. Lifetime employment by large corporations is a thing of the past, and expensive private schools are the ticket to success. Sound familiar? Egalitarianism has been replaced by kachigumi and makegumi ("the winning team" and the "losing team"). Previously discussed here.

NYTimes: Today, in a country whose view of itself was once captured in the slogan, "100 million, all-middle class society," catchphrases harshly sort people into "winners" and "losers," and describe Japan as a "society of widening disparities." Major daily newspapers are running series on the growing gap between rich and poor, with such titles as "Divided Japan" and "Light and Darkness."

...Mayumi Terauchi, 38, began receiving education aid when her 7-year-old son, Yuuki, started school last year, to help bear the costs of the backpack, cafeteria lunches and other necessities not covered in public schools. She frets that his place and that of her 1-year-old daughter, Natsumi, are already fixed in the new Japan of winners and losers.

Ms. Terauchi sees a "huge gap" in quality between public and private schools here in Osaka. But she and her husband cannot afford the private schools, or even the cram schools — for-profit supplemental programs — that would raise their children's chances of getting into good colleges and securing their future.

...Until a generation ago, in keeping with the belief that wealth must be redistributed, the highest personal income tax rate was 75 percent. It was gradually lowered, to its current rate of 37 percent in 1999, before Mr. Koizumi took power. Under his government, the capital gains tax on sales of stocks was lowered from 20 percent to 10 percent in 2003, and inheritance laws were changed to make it easier to transfer large assets. Meanwhile, the government decreased health and pension benefits. a country famous for its savers, the number of households reporting no savings doubled to 24 percent — the highest figure since the early 1960's. And the number of households receiving welfare payments rose by more than 37 percent to more than a million households. From 2000 to 2004, the number of schoolchildren receiving aid rose by 36 percent to almost 13 percent of elementary and junior high school students.

...Mr. Yamada, the sociologist, says the disparities are sharpest among Japanese in their 20's and 30's, among whom two groups have emerged: full-time employees and permanent temporary workers.

"The reason that there are no riots in Japan as in France is that most of these young people live with their parents," Mr. Yamada said, pointing out that even 12 percent of Japanese between the ages of 35 and 44 lived with their parents in 2004. With free housing and food, those with temporary jobs can still afford to pursue personal interests.

..."I wonder what kind of country Japan is becoming if you're told you're either a winner or loser," she said. "I don't want to be either. I just want to lead an average life."

Wednesday, April 12, 2006

Greenspan tells it like it is

Now that he's no longer Fed Chairman he can tell it like it is. Asian currencies to appreciate vs the dollar (evoking the Plaza Accord), a global asset bubble driven by liquidity, and Sarbanes-Oxley an undue burden on corporations.

Financial Times: Greenspan calls for stronger Asian currencies

Alan Greenspan, former chairman of the US Federal Reserve, on Wednesday said that current imbalances in the global economy could be corrected if high-growth countries allowed their currencies to strengthen.

Mr Greenspan’s remarks were in response to a suggestion on whether Asian countries should consider their own Plaza Accord-style agreement, similar to the one the US reached with Europe and Japan to coordinate intervention in the foreign exchange market to weaken the dollar and reduce the US trade deficit.

“The equilibrium is better reached by allowing a number of these countries that show a much higher growth rate than developed countries to allow their currencies to firm,” Mr Greenspan said. He was speaking to the FT Asian Financial Centres Summit in Seoul via satellite.

“I realise what that does to competitiveness, but that’s the way markets work efficiently. Endeavouring to prevent the exchange rates from moving creates all sorts of distortions.”

Mr Greenspan also warned of a potential fall in global asset prices, stressing that the ample liquidity currently in the financial system appeared to be an “abnormal situation” and could not last forever.

He said the source of this liquidity was the market value of assets worldwide, which had been rising faster than nominal gross domestic product globally due to a decline in real long-term interest rates and a significant fall in real equity premiums.

“A good part of this expansion is a direct function of the decline in real equity premiums. That cannot go on indefinitely,” he said.

“I don’t know when the liquidity is going to decline but I am reasonably certain that what we’re looking at is an abnormal situation.”

The former Fed chairman also said he was disturbed over the effects the US Sarbanes-Oxley act – the more stringent corporate governance rules introduced in 2002 - was having in driving away listings of foreign companies.

“The base of Sarbanes-Oxley is a definite advance in corporate governance in the US. There are sections of the bill which were put together rather quickly, in particular Section 404, and which creates a heavy burden on the accounting system and is an anathema to foreign investors who endeavour to list IPOs in the US and have chosen not to.”

Tuesday, April 11, 2006

50 years of Howl

by Allen Ginsberg

I saw the best minds of my generation destroyed by madness, starving hysterical naked, dragging themselves through the negro streets at dawn looking for an angry fix, angelheaded hipsters burning for the ancient heavenly connection to the starry dynamo in the machinery of night, who poverty and tatters and hollow-eyed and high sat up smoking in the supernatural darkness of cold-water flats floating across the tops of cities contemplating jazz, who bared their brains to Heaven under the El and saw Mohammedan angels staggering on tenement roofs illuminated, who passed through universities with radiant cool eyes hallucinating Arkansas and Blake-light tragedy among the scholars of war, who were expelled from the academies for crazy & publishing obscene odes on the windows of the skull, who cowered in unshaven rooms in underwear, burning their money in wastebaskets and listening to the Terror through the wall, ...

NYTimes: Ginsberg wrote "Howl" in San Francisco and Berkeley; he read the long first section in public for the first time in San Francisco in 1955, and the whole of the poem for the first time in Berkeley the next year. (A CD of that performance is included in this book.) All sorts of divisions, exclusions, restrictive manners and deferences that were second nature in the East were missing in the Bay Area. If the primary terrain of the poem is New York City, the freedom one could find in California in the 50's is crucial to the air that blows through the dank rooms of "Howl," blowing all the way back to New York...

Saturday, April 08, 2006

More podcasts

Some more podcast recommendations, all available here. Thanks to the podcast, I never get bored while running anymore. I listened to Suketu Mehta's wonderful talk while on a hotel treadmill, usually the most mind numbing of exercise venues!

You can access these as streams, if you don't have an ipod.

East Meets West

Oded Shenkar, Author, "The Chinese Century" -- The US has the largest, most robust, and most flexible economy in the world, but within twenty years, China will likely surpass the US in at least one of those. In this presentation from PopTech! 2005, Oded Shekar, the Ford Motor Company Chair in Global Business Management at Ohio State University and author of the book The Chinese Century, outlines China's rise and what it might mean for the US in the coming years.


Suketu Mehta, Author, "Maximum City" -- Award winning writer Suketu Mehta tells us that his home town of Bombay and other mega-cities foreshadow the future. Bombay juxtaposes hopeless poverty, crowding, and inequity with riches and a vitality that draws a flood of young immigrants from rural villages. Although Mehta paints a grim picture, he sees hope in the exercise of democracy by the poor and a culture where people help each other while expecting little from their government.

Tuesday, April 04, 2006

Vive les grandes ecoles

I guess the US is not the only country with an increasingly elitist economy and education system.

Economist: One of the arresting features of the current student movement is how little it has touched France's grandes écoles. Sciences Po, a feeder college for these elite schools, has seen nothing of the violence or forced blockades of nearby Paris universities, such as the Sorbonne. Nor have most of the country's top undergraduate business or engineering schools, such as Polytechnique, HEC or ESSEC. Students at such places, taught the latest in finance and economics, understand the price France will pay if it refuses to change. These are the well-trained graduates snapped up by banks in London and New York which are only too happy to benefit from what France does best, and by those French companies now busy exploiting globalisation with such aplomb.

These two faces of France are separated early in the country's two-tier higher education system. At the top, the grandes écoles cater to a small minority and are highly selective: would-be pupils spend at least a year in a preparatory class just to take the entrance exam. While the Ecole Nationale d'Administration (ENA) is the best-known (and arguably the least well-adapted to the global economy), it recruits only a tiny share of the total. The rest are autonomous, and highly specialised in areas such as engineering or business. And employers pay a premium to hire their graduates. A recent study by Le Nouvel Observateur magazine showed that 96% of graduates from top engineering schools were placed two years later in permanent jobs, earning an average of €30,400 ($36,600). By contrast. only 45% of university psychology graduates had found permanent jobs by the same stage, and their average income was €19,000.

Buffet and derivatives

Warren Buffet was an outspoken critic of derivatives a few years ago, calling them a financial weapon of mass destruction. Odd, coming from someone whose holding company benefits from tremendous cash flow generated by its insurance and reinsurance businesses. Now we learn that Buffet has sold a huge put option, essentially insuring the counterparty for the next 15+ years against a crash in four international stock indices.

IHT: The "long-duration equity index put contracts" are among the largest transactions that Berkshire has disclosed, and they represent the kind of risk that Buffett, the company's chief executive, and Charles Munger, the vice chairman, are turning to more often as undervalued companies get harder to find.

...He has been a critic of derivatives, obligations whose value is tied to the price of underlying assets such as stocks, debt or oil. In 2003, he called them "financial weapons of mass destruction" and since 2002 Berkshire has been unwinding the derivatives positions at the securities unit of its General Re subsidiary.

Still, Berkshire, controlled by Buffett since 1965, continues to use derivatives to take financial risks of its own. The March 7 filing said it had $801 million of derivative contract assets and $5.06 billion in liabilities as of Dec. 31. That included $35 million of assets and $1.59 billion in liabilities on equity-option contracts with a notional value of about $14.5 billion.

This is a job for... Robot Genius!

The head of MSFT's security solutions group admits that sophisticated malware is uncleanable using current methods, and suggests that enterprises just get used to wiping and cleaning infected machines.

I think his group will be very interested in our technology. Thanks to an unnamed former string theorist for sending us the article :-)

E-week article: "When you are dealing with rootkits and some advanced spyware programs, the only solution is to rebuild from scratch. In some cases, there really is no way to recover without nuking the systems from orbit," Mike Danseglio, program manager in the Security Solutions group at Microsoft, said in a presentation at the InfoSec World conference here.

Offensive rootkits, which are used hide malware programs and maintain an undetectable presence on an infected machine, have become the weapon of choice for virus and spyware writers and, because they often use kernel hooks to avoid detection, Danseglio said IT administrators may never know if all traces of a rootkit have been successfully removed.

He cited a recent instance where an unnamed branch of the U.S. government struggled with malware infestations on more than 2,000 client machines. "In that case, it was so severe that trying to recover was meaningless. They did not have an automated process to wipe and rebuild the systems, so it became a burden. They had to design a process real fast," Danseglio added.

Danseglio, who delivered two separate presentations at the conference—one on threats and countermeasures to defend against malware infestations in Windows, and the other on the frightening world on Windows rootkits—said anti-virus software is getting better at detecting and removing the latest threats, but for some sophisticated forms of malware, he conceded that the cleanup process is "just way too hard."

...We've seen the self-healing malware that actually detects that you're trying to get rid of it. You remove it, and the next time you look in that directory, it's sitting there. It can simply reinstall itself," he said.

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