Women traders

On this day, 26 March, in 1973 women were were allowed on to the floor of the London Stock Exchange for the first time.

Hedge fund performance

Pommygranate blogs on hedge funds-

In order to keep the client money rolling in, hedge funds have to show to the world that they really do make outsized returns. Hence these ever ingenious folk have come up with a unique concept - 'survivor bias'. This means that the HF Indices showing overall returns exclude those HFs that have gone bust (about 1 in 5 each year) so blostering the average returns. Neat, huh?

His other Ten Things You Should Know About Hedge Funds.

The danger of Black Scholes

An article by Michael Lewis in Portfolio magazine points out the flaws in the Black Scholes model. One of which is the higher occurence of extreme market moves than previously assumed (on the same topic see also Nassim Taleb in The Black Swan). Another problem is the difficulty of taking a short position - and dynamically managing that position - when a market is crashing.

This is not just of academic interest, as according to Lewis-

At the end of 2006, according to the Bank for International Settlements, there were $415 trillion in derivatives—that is, $415 trillion in securities for which there is no completely satisfactory pricing model. Added to this are trillions more in exchange-traded options, employee stock options, mortgage bonds, and God knows what else—most of which, presumably, are still priced using some version of Black-Scholes.

Lewis concludes-

Financial panics have become almost commonplace; events that are meant to occur once in a millennium now seem to occur every few years. Could this be because the financial system was built on an idea that badly underestimates the risk of catastrophes—and so conspires with human nature to create them?

S&P 500 volatility at 70-year high

According to a Reuters report, volatility of the S&P500 Index (as measured by the VIX Index) is at a 70 year high. The report says-

Measured by daily changes of at least 1 percent in the index, volatility has soared since credit concerns became a critical issue in the summer of 2007

The stock market today and in the 1970s

From an article in today's Telegraph, written by George Blakey, author of A History of the London Stock Market-

While it is tempting to to blame today's chaotic market conditions on the complications resulting from the introduction of countless new exchange-traded derivatives over the past decade, there's nothing new about booms and busts.

They originate in periods of credit expansion and end in periods of credit contraction, a sequence that gives banks a pivotal role to play. This was very much the case in 1972-1975.

The abolition of credit controls and the opening up of competition in 1971 paved the way for the secondary banks and the hire-purchase companies to make inroads into what had once been the exclusive preserve of the big commercial banks, and all went on a lending spree, principally funding property investment.

When it all came tumbling down, thanks to a soaring oil price and a domestic background of strict price controls coupled with a wages free-for-all, the banks ran for cover and called in their loans. The fact that many borrowers were unable to repay them meant that the banks were in big trouble.

One by one the secondary banks collapsed, and rumours swirled around the clearing banks, prompting the Bank of England to issue a denial that that National Westminster Bank had ever requested or been offered large scale support as its shares slipped below par.

The article ends-

This one is going to run and run, and when triple A mortgage-backed securities are getting tarred with the subprime brush,one lesson we can heed from 1974 is the advice Jim Slater gave to his shareholders in May of that year when the stock market was poised to halve again, "Cash is the best investment now".

The sub-prime market explained

You want a real crisis?

Tom Stevenson in the Telegraph today reviews the new book A History of the London Stock Market 1945-2007, and puts the current market volatility in some perspective-

The year 1974 opened with a sky-high oil price, miners and rail workers on strike, a million laid off as energy-starved industries cut production and sterling in free-fall. NUM vice-president Mick McGahey called on troops who had been drafted in to keep coal moving to remember their working-class roots and defy orders. Tony Benn plotted state intervention in Britain's biggest companies while Denis Healey promised to squeeze the rich until the pips squeaked. Both NatWest and Lloyds fell below their par values and by the end of the year the FT30 had fallen 70pc below its May 1972 high.

Schroders Agriculture Fund closed

The Telegraph reports today that Schroders has closed its $6bn agricultural fund after too many investors rushed to plough money into it.

The Alternative Solutions Agriculture Fund, invested in grains and livestock, returned 48pc since it was launched in October 2006.

The fund's top five holdings at the start of the year were wheat, soybean, coffee, corn and sugar.

Buffett back on top

The BBC reports that Warren Buffet has reclaimed the title as the world's richest man. Last year Buffett's wealth increased $10bn to $62bn.

A lot of money, $62bn. But how much is 62 billion (or 62,000,000,000)? Let's look at time-

• 62 billion seconds ago it was the year 42AD - the year that the apostle Paul converted to Christianity and Claudius was emperor of the Roman Empire.
• 62 billion minutes ago was the year 115,952BC - it's difficult to say exactly what was happening in the world this year - history hadn't been invented yet - but generally Homo Sapiens (that's us, modern people) were just evolving in Africa.

A billion here, a billion there, pretty soon...

Forbes magazine has just published its latest rich list. Some highlights-

• A record 1,125 individuals with a combined net worth of $4.4 trillion made it into Forbes' 2008 list of billionaires.
• Two-thirds of those on the list are classified as self-made billionaires, and 50 of them are under the age of 40.
• Mark Zuckerberg, 23, the founder of the social networking site Facebook, joins the list as the world's youngest billionaire.
• Patrice Motsepe joins the list as South Africa's first black billionaire with a net worth of $2.4bn.
• The world's richest woman is the French L'Oreal chief, Liliane Bettencourt, 17th on the Forbes list with a net wealth of $22.9bn.

The least well-timed investment decision of this or any age

Between July 1999 and March 2002, Gordon Brown sold 395 tonnes of the UK’s gold at an average price of $275.6.

Robert Peston calls Mr Brown's trade as one of the-

“least well-timed investment decisions of this or any age”

Today gold traded above $984.