The smartest guy in the room – Jim Keohane’s Canadian pension magic; Hedge fund manager scorecard

Jul 11, 2019

Observations & Insight

Thursday Miscellany
Spencer Doar – JLN

Here’s a sample via RCM Alternatives of how some volatility funds performed in June:

Sticking with RCM, here’s how some options funds performed in June:

For more on some notable fund performances, see the Bloomberg story in our Lead section.

Henry Schwartz of Trade Alert had this to share on LinkedIn: FLEX Options continue to shine brightly in 2019 with record volume in Q1, and nearly 1.5M contracts trading on July 2nd – 9% of the listed volume.

Schwartz touched on the FLEX trend and other topics in our video with him from OIC – The State of the Options Industry: Great, But Not 2018 Great.

Last, but far from least, don’t forget to sign up your interns or newer employees for MarketsWiki Education World of Opportunity. Details are on


Hemp and Cannabis: Disrupting the Agricultural Economy
As industrial hemp cultivation gains traction and legal cannabis gains wider acceptance, ancillary service providers are cropping up. In this video, New Leaf Data Services CEO Jonathan Rubin talks about why the cannabinoid space is one to watch.
Watch the video »
****SD: Not options, but a fascinating developing market.

Lead Stories

The smartest guy in the room: How pension guru worked his magic, beat the market and saved Home Capital
Barbara Shecter – Financial Post
There are seminal moments in any career and Jim Keohane’s is a doozy. He knew something was wrong when his lowball offer for Canadian Pacific Railway shares, lobbed in at $1 below the asking price, was instantly accepted.

****SD: Canadian pension plans are consistently mentioned as savvy in options markets and most Canadian pensions are pretty well funded. As of June, corporate pension plans in Canada were 92 percent funded.

Keohane was responsible for pivoting Healthcare of Ontario Pension Plan (HOOPP) to more derivatives trading activity. (HOOPP was 121 percent funded in 2018!)

From the story: “The transition began after the dot-com bust in the early 2000s, and included a shift to extensively use derivatives — including futures, options and swaps — both as a hedge to limit losses when markets do poorly, and to increase returns. The strategy helped HOOPP weather the financial crisis better than other pension funds in Canada and around the world. In 2008, the fund lost 12 per cent compared to losses of between 15 and 25 per cent at other large pension funds, according to a World Bank Group report in 2017.”

Here’s How the Biggest Hedge Fund Managers Did in the First-Half
Katia Porzecanski – Bloomberg (SUBSCRIPTION)
It’s been the best start to a year for hedge funds in a decade, and the returns for the biggest multi-strategy money managers are in.
Ken Griffin, who runs the $30 billion hedge-fund firm Citadel, is beating his largest rivals, gaining 13.6% in the first six months of the year in his flagship funds, according to a person with knowledge of the matter. Those funds, Kensington and Wellington, are market neutral — so their bullish wagers are matched by bearish ones. All five of the strategies that feed into them made money over the period, said the person.

****SD: Other hedge fund news via Reuters Hedge funds move away from unpopular ‘two and 20’ fee model, Forbes Risk Factors Feeding Hedge Fund Performance and Business Insider Prime The hedge fund industry has a problem with managers cherry-picking performance. 1 group wants to stop that.

New real-time index for Japanese bonds launched
Audrey Raj – Citywire Asia
S&P Dow Jones Indices has partnered with the Japan Exchange Group (JPX) and Osaka Exchange (OSE) to launch a real-time index to help global investors manage volatility trends in the Japanese bond market… The S&P/JPX JGB VIX Index measures the volatility of Japanese government bonds using options on JGB futures listed on OSE. It adopts the methodology of the CBOE Volatility Index, introduced by the Chicago Board Options Exchange to gauge equity market volatility.

Inside Volatility Trading: July 10, 2019
Kevin Davitt – Cboe Blog
Cboe’s VVIX Index, which is an indicator of the expected volatility of the 30-day forward price of the Cboe Volatility Index (the VIX Index), has garnered considerable attention in recent days. On Tuesday, July 2, the implied volatility of VIX options as measured by the VVIX fell below 76 for the first time since late February of 2019.

Deutsche Bank derivative dumbness
Jamie Powell – Financial Times (SUBSCRIPTION)
In financial markets, there’s always a new reason to worry.

***SD: Missed this Monday. TL;DR – notional exposure is far from the same as net exposure. Also, some DB news from Alphacution – Remembering Deutsche Bank: A Market Macro-Structure Canary?

Markets misunderstand Brexit chaos lying ahead
Helen Thomas – Financial Times (SUBSCRIPTION)
A new prime minister, two new parties, three failed parliamentary votes, but still no Brexit. And so it will continue, at least according to financial markets.
The anticipated volatility in British assets remains subdued, with the extension to the March 29 exit deadline simply confirming that parliamentary arithmetic will lead to a softer Brexit, or none at all. We are in a becalmed world, devoid of risk. The Federal Reserve and the European Central Bank are poised to restart the soothing stimulus that has helped to drive equity markets up to all-time highs.

****JB: Also see The Financial Times – Bank of England warns of rising risk of no-deal Brexit

Fed’s Bullard Leans Toward Rate Cut at July Fed Meeting
Michael S. Derby – WSJ (SUBSCRIPTION)
Federal Reserve Bank of St. Louis President James Bullard said Wednesday that based on where the economy is now he still favors a quarter-percentage-point rate cut when policy makers meet at the end of the month.
Speaking with reporters after an event Wednesday, Mr. Bullard also said he sees another lowering of rates happening after that, for a cumulative half-percentage-points’ worth of easing by year-end.

Exchanges and Clearing

Equity Index Highlights
Eurex Exchange
Equity Index Highlights – July 2019 edition

****SD: Euro STOXX 50 index options volumes were up 4% YoY. (The whole index options suite did well.)

EEX to develop nascent Japanese power derivs market
James Thursfield – Global Investor Group (SUBSCRIPTION)
EEX intends to develop the Japanese power derivatives market which is still in its “infancy”

Derivatives Market to position Kenya as a leading financial services hub
Capital Business
The Nairobi Securities Exchange (NSE) launched the NEXT Derivatives Market, Thursday making it the second African Exchange to launch a Derivatives Market.


How hedge funds use drones, satellite images and web scraping to gain an edge
Matt Egan – CNN
Last summer, a large hedge fund had a hunch: Lumber prices were about to crash because of excess inventories caused by a railway strike.
Before placing a massive short bet that lumber company share prices would fall, executives at the hedge fund confirmed the theory by hiring a drone to fly over lumberyards, people familiar with the matter told CNN Business.
“You could literally see lumber piling up everywhere,” one of the people said.


20 single-stock options trades for earnings season from Goldman Sachs
Marley Jay – Business Insider (SUBSCRIPTION)
Earnings season is about to start. And with S&P 500 profits widely expected to fall, Wall Street isn’t preparing for a party.
According to Goldman Sachs, things might be even more difficult than they look. Stocks are getting more volatile on earnings days relative to years past. But investors — at least in the options market — haven’t caught on to that pattern. And that’s creating opportunities for shrewd traders.

****SD: Four trades in particular they single out: buy Twitter, Zynga and Caterpillar calls and buy straddles on Blackrock.

Playing the Fed’s Next Rate Move
Steven M. Sears – Barron’s
Jerome Powell has a reputation for being a consensus builder. In a town like Washington that lives on conflict, the Federal Reserve chairman reportedly managed to offend no one before rising to his present position in February 2018. Yet he has offended and annoyed the man who made him the most powerful person in global financial markets—President Donald Trump.
Powell’s recent congressional testimony could be construed as hinting that the central bank may lower rates, as Trump wants. The market expects a rate cut of 25 to 50 basis points. (A basis point is 1/100th of a percentage point.)

What Higher Volatility Could Mean for Futures Traders in Q3
Carley Garner – CME Group OpenMarkets
Regardless of the chosen trading strategy or even the instruments traded; results generally cycle from feast to famine. A friend of mine, Linda Raschke, once said: “The minute you think you have found the key to trading, I promise you the markets will change the lock.”


Aptus expands risk management suite with launch of options collar ETF
James Lord – ETF Strategy
Independent investment manager Aptus Capital Advisors has launched a new actively managed equity ETF that seeks to provide income while offering downside protection through the use of option strategy overlays.

How Many Heads Does It Take To Run A Bank?
Paul Rowady – Alphacution Research Conservatory
There was a time when we dedicated a lot of effort on these pixelated pages to the impacts of technology on the bulge bracket investment banks and other major sell-side players. We even set out to track the aggregate headcounts of the top 9 investment banks – a Headcount Index, of sorts – as one paradoxical attempt to quantify the adoption of technology, and therefore, the implied pervasiveness of workflow automation in the post-Global Financial Crisis (GFC) era. The idea being that increasing workflow automation would ultimately yield lower headcounts.

Record-Long U.S. Economic Expansion
Bluford Putnam – CME Group
On June 30, 2019, the current economic expansion tied the old record from the Clinton decade of 40 quarters, and as each month passes without a recession it will be setting new records for duration (although not strength, but that is another story, for another report).

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