Friday, June 20, 2008

Open source work

This is the best presentation I have seen to illustrate the efforts of open source community work. Watch the date updating on the bottom-right corner of the screen. 

Monday, April 21, 2008

Recession, recession, we told you so!

I've been reading recession predictions in the press and media for at least six months, together with the routine liquidity crisis commentaries and financial apocalypse scenarios (Side note: how many banks filed for bankruptcy in the US in 2007? Answer: 3). The one-month economists are always there to pound the medias in times of fear, always. They then quietly fade-out when the market unexplainable starts rising again. Oh well, we are in a bear rally is one of those sentences used by the last permabear standing. Well, this bear rally started 5 years ago and is now seeing a renewed batch of positive indicators: retails sales, production, technology and leading indicators were all up in March. Even real-estate is showing positive returns YTD.

Reality is, all recessions and major financial shocks occurred in times of economic euphorias and excess optimism. The major recessions starting in 1929 and 2000 developed in a climate of high speculative interest and widespread gains, in other words when demand was exhausted. Supply and demand, the basic mechanism regulating all markets, is still the most important indicator today if you believe in modern capitalism and the last 100 years of economic history. Other than that, nothing has changed in my view, except the ability of public financial authorities to regulate liquidity, thus affecting the currency markets. As per emerging economies, risk lowers, does not rises, when the economy expands by creating diversification.

I've been bullish on the economy for the last 5 years and I don't see signs of recession as of yet. My equity portfolios have been recovering the losses suffered during the liquidity crisis and I am looking to close another year with gains in excess of 10%. Money flows and sector trends (commodities in particular) have been very helpful in determining my model allocations, as I wrote in a January post.

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Thursday, April 3, 2008

Rydex alternative strategies fund (RYFOX)

Good article on describing the new Rydex Alternative Strategies Allocation Fund (RYFOX). According to Rydex, the offering is aimed at retail investors in search for assets and strategies diversification:

The fund invests in a diversified portfolio of hedge funds and futures funds spanning the universe of absolute return, commodities, currency arbitrage, global macro, managed futures and real estate strategies, according to the firm.

But, says, where is the limit between hedge fund "replication" and attempts to actually run a quant hedge fund?

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Thursday, March 6, 2008

IT spending on market data infrastructures to reach USD 7.8B by the end of 2010

According to this report by Aite, trading systems growth is set to continue at around 1B a year for the next 3 years. Among the factors challenging vendors, Aite mentions markets fragmentation and a further increase in data volume, which in most cases is already at a critical level for most of today's OM/ES platforms (believe me, I know something about it):

"Trading systems have not kept up with the growth in data coming at them," says Brad Bailey, senior analyst with Aite Group and co-author of this report. "The complexity of the high-performance infrastructure and the rapidity with which it evolves has created opportunities for specialized vendors."

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Majestic Research

The trading strategies in the Demo account look for patterns based on information collected from standard K1 and Q1 filings and price/volume data. I always thought about developing a model based on an alternative data set and Majestic Research seems to offer that option. Their databases includes industry-specific historical data, such as "Yield per RPM" and "Passenger revenue estimates" for airline companies, and "Cancellation rates" and "Planned inventory trends" for homebuilders.

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Sunday, March 2, 2008

India IT salary growth

In a previous post I wrote about IT India off-shore costs rising and how the open source model offers a better alternative to infrastructures savings. Today I came across this article on Forbes putting some figures on Indian IT salary growth:

As the fight for talent intensified last year, salary hikes rose from
the previous year’s average of 14.4%, according to the study. In 2008,
compensation is expected to increase by an average of 15.2%, making it
the fifth consecutive year that salaries have risen in excess of 10%.

Real estate salaries grew by an average of 25.2%, compared with 17.6% in retail and 16.4% in banking and finance.

Clearly, the IT off-shoring model can not be sustained with these numbers in mind. A mixed software development model is emerging, where commercial code representing significant, core competitive advantage follows the classic copyrighted model, while larger parts of the development effort is released as open source for the benefit of higher quality service and lower infrastructure costs. Nothing new really under the sun: major innovators such as Apple, Google and Yahoo have followed this path for years now, with the introduction of operating systems and search engines based on open source code. Microsoft and Oracle are following: here and here.

New software players like Trolltech and MySQL have adopted a dual licensing model, where open source code can be either used in commercial applications for a fee, or else modifications to the original code must be released with the same open-source license.

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Wednesday, February 20, 2008

The Open Group quest for parallelism

Yet another round of financing for academic research in parallelism, this time in Europe. EE Times reports:

Supported by the European Commission, the Java Environment for Parallel
Real-time Development (JEOPARD) project is investing over €3.3 million
(about $ 4.9 million) an advanced framework
for real-time Java running on multicore and parallel systems.

Led by The Open Group (Reading, England), the JEOPARD consortium
includes four universities and research institutes: University of York
(England), Vienna University of Technology (Austria), FZI (Research
Center for Information Technologies at the University of Karlsruhe,
Germany) and the Technical University of Cluj-Napoca (Romania); three
industrial manufacturers: EADS NV (Schiphol-Rijk, Netherlands),
RadioLabs (Rome, Italy) and SkySoft (Lisbon, Portugal); and two
embedded systems technology suppliers: Aicas (Karlsruhe, Germany) and
Sysgo (Klein-Winternheim, Germany).

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Thursday, February 14, 2008

Berkley lab

EE Times has an article on a $10M Intel and Microsoft grant that will finance the Berkley lab, a group focused on research in parallel programming. The move is meant to close the gap between hardware multi-core architectures, now in mature state, and software development tools.

The original Berkley lab white paper was published in December 2006 and is available here.

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Wednesday, February 13, 2008

Another Sun open source acquisition

VentureBeat reports that Sun has acquired Innotek, a company developing an open source desktop virtualization software called VirtualBox. Sun move follows the acquisition of MySQL and other open source companies such as StarOffice.

There are now at least three different offers to run virtual machines: Parallels, VMWare and VirtualBox. This acquisition marks the definitive commoditization of computer hardware. Today you can run any of the major OSes (MacOS, Windows, Linux) on the two major consumer machine: Mac and PC hardware are in facts completely compatible (through Bootcamp or a virtual machine product) and Intel-compatible Linux servers are replacing older HP and Sparc hardware in the corporate world.

One can't say proprietary architectures have been very successful over the last 10 years. DEC (acquired by Compaq), HP, IBM, SGI, Sun and Apple have all converged towards an Intel-compatible platform. Ironically, this represents the best time for consumers to consider alternatives to Windows-only machines. Microsoft is now put under pressure from both the convergence towards a common platform (thus making the OS less relevant) and the Internet. The old proprietary OS model is fading out, as are other parts of the enterprise infrastructure.

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Monday, February 11, 2008

Multicore virtual platforms

I had never heard of multicore virtual platforms before. This article from EE Times claims multi-core debugging issues can be resolved with the use of virtual platforms:

Even a parallel compiler does not address all the challenges posed when processors overwrite each other's memory areas, lock each other out of shared memory and race to complete tasks sooner (or later) than expected. The debugging capabilities of a physical prototype can typically handle freezing only one processor at a time, leaving the others running, and likely writing over memory locations needed for debugging.

Virtual platforms overcome this challenge by freezing all the processors simultaneously (including all IPC hardware and peripheral clocks) at breakpoints, giving complete visibility into all system states. To help achieve this complete hardware visibility, peripheral functionality can be captured in a graphical finite-state machine (FSM) language that combines graphical flowchart constructs with the execution power of ANSI C. This type of graphical language simplifies descriptions of concurrent hardware interactions and dramatically increases the MC visibility and controllability.

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Friday, February 8, 2008

The future of multi-core by CPU designers

The EE Times online has an interesting review of the International Solid State Circuits conference in San Jose (Feb 5). Senior staff at AMD, Renesas, IBM and Tilera shared their view on the design of the next multi-core systems. Here are some interesting extracts about the role of software following multi-core architecture developments:

Shekhar Borkar, director of Intel Corp.'s Microprocessor Technology Lab, said microprocessor cores will get increasingly simple, but software needs to evolve more quickly than in the past to catch up.

"A core will look like a NAND gate in the future. You won't want to mess with it," said Borkar. "As for software, the time to market has been long in the past, but we can't afford to let that be the case in the future," he added.

Dave Ditzel, former CPU architect at Sun and founder of Transmeta, agreed. A member of the audience, Ditzel told the panel he helped design Sun's first 64-bit CPU then waited nearly ten years before commercial 64-bit operating systems became available.

Ditzel borrowed a metaphor from Berkeley computer science professor Dave Patterson to describe the current situation.

"With multi-core it's like we are throwing this Hail Mary pass down the field and now we have to run down there as fast as we can to see if we can catch it," Ditzel said.

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Thursday, February 7, 2008

What makes a successful entrepreneur?

A Marginal Revolution post linking to a paper from the World Bank analyzing Brazilian entrepreneurs. Cowen highlights some observations in his post but what I found most interesting (and controversial) is the following:

Interestingly, we find that having family and relatives run a business not only increases the probability of a respondent to be an active entrepreneur but also (and to a significantly larger extent) the probability to be a “failed entrepreneur.”

The most striking differences between active and failed entrepreneurs are as follows. Failed entrepreneurs are significantly less risk-taking. Interestingly, they report to have been significantly more often among top 10% in school even though they exhibited the lowest cognitive test scores. The low actual test scores point to the likely overestimation of failed entrepreneurs’ self-reported performance in school.

Overall, the results suggest that social networks play a big role in the decision to become an entrepreneur but not in determining whether entrepreneur will be successful. In contrast, the absence of risk-taking and greed, poor cognitive abilities, and over-evaluation of one’s self seem to be the main reasons to quit entrepreneurship. These results are similar to what we have found in Chinese survey (the data from Russia are not comparable).

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Tuesday, February 5, 2008

80% of commercial apps to use open source by 2012

A few days ago I posted about open source software gaining ground in mayor IB projects. Today I came across a post on that reviews a research by Gartner claiming 80% of commercial apps will use open source by 2012. I have a better time estimate for this process to happen: 2008. Open source tools are so widespread in software companies that I even wonder who is developing without using any (my thoughts run to some obvious hits, like Linux and g++, to more infrastructures-oriented products such as Samba and MySQL).

The Gartner gurus comment:

By 2012, 80 per cent of all commercial software will include elements of open-source technology. Many open-source technologies are mature, stable and well supported. They provide significant opportunities for vendors and users to lower their total cost of ownership and increase returns on investment. Ignoring this will put companies at a serious competitive disadvantage. Embedded open source strategies will become the minimal level of investment that most large software vendors will find necessary to maintain competitive advantages during the next five years.

Thanks Gartner. The report goes on with a number of IT forecast which are quite fun to read. For example, they have a take on Apple doubling PC market share by 2011 and the number of 3-D printers growing 100-fold through 2011. What I found more interesting is their view about software distribution, which should move from a license-based model to a service subscription charge (SaaS), an approach apparently endorsed by Google and Amazon:

By 2012, at least one-third of business application software spending will be as service subscription instead of as product license. With software as service (SaaS), the user organisation pays for software services in proportion to use. This is fundamentally different from the fixed-price perpetual license of the traditional on-premises technology.

Link to the original Gartner post.

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Simple equity market neutral fund

Mr. Hui out at the HSUTM blog has an interesting post on a simple market neutral portfolio:
  1. Buy the top large cap Growth and Value equity funds, as ranked by Morningstar
  2. The funds must be no-load mutual funds, have assets of at least a billion dollars and expense ratios less than 1%
  3. Short the S&P 500 Spyder (SPY) against the portfolio
  4. Re-balance the dollar amounts allocated to the funds monthly and re-balance the fund components annually
For the period from December 1998 to Janaury 2008 the synthetic equity
market neutral portfolio showed a very respectable annualized return of
6.4% (after fees) and a Sharpe ratio of 0.9.

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Thursday, January 31, 2008

Open source off-shoring

Following a post in Enypher blog, I came across, the company behind OpenAMQ. OpenAMQ is an open source implementation of AMQ, a messaging middleware protocol designed for low latency, critical applications. JPMorgan contributed to the project from 2004 and migrated trading desks globally over the last 3 years. iMatix claims zero downtime since 2006.

The middleware open source offering is spreading its wings. We are now seeing a number of projects challenging commercial applications: I mentioned RedHat MRG in an earlier post, OpenMPI is the product of years of research in multi-core systems and parallelism, Hadoop is a data management and clustering solution sponsored by Google, Yahoo and HP. 0MQ is the last open source initiative for very low-latency middleware, backed by FastMQ and Intel.

This prompts for the question: How much money has been saved by financial corporations sponsoring open-source initiatives vs. structural off-shoring?

For the last 10 years (ever since I got involved in trading systems development) the refrain of every business manager was about IT development going to India. Entire IT departments were counting their days and Bangalore was going to become the new mecca of finance IT development. Starting with back-office systems and gradually moving to the middle-office and desk applications, the future of IT management was in off-shoring. Keyword: cost-cutting. Ah..., the commoditization of finance IT...

Today Bangalore is the Silicon Valley of India and --guess what-- production costs there have risen. At the same time we have seen a number of open source projects emerging as the de-facto standard in finance: in the 90s, X11 and Motif were the state-of-the-art for front-office GUIs; Linux is now used in critical server applications; Cygwin X Server offers a no-cost alternative to Exceed; SOAP, XML and HTML are open standards; Samba and SVN are the best tools I know for remote file access and source code management in terms of price/quality (hint: price = 0). Is MySQL next?

In my view, the fundamental error lies in seeing software development as an industrial process, rather than a creative intellectual effort. Not surprisingly, the IT and the Business units in most investment banks have been organized as two separate entities, with the latter framed mainly as a support center rather than core-business. Today the move that saw venerable technology institutions (HP, IBM, DEC, SUN...) supporting academic efforts in the past might spread to financial institutions supporting open-source projects. After all, it's all about cost-cutting.

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Bill Ackman Open Source Research

So now even Bill Ackman is embracing the open source model :) In this open letter to MBIA's and Ambac's state insurance regulators, the SEC and the Federal Reserve he states:

"Our primary goal is to initiate what we call “Open Source Research” where all market participants can have equal access to the primary source data and construct their own views of losses without reliance on the analytical judgment of rating agencies or the bond insurance industry. By focusing the discussion on a fundamental, data-driven approach, we expect that the dissemination of the Open Source Model will enable market participants and regulators to accurately estimate probable losses by relying on rigorous fundamental analysis of specific credit exposures, a departure from relying on the opaque, faith-based pronouncements that the bond insurance industry has promulgated to the marketplace."

Bill Ackman runs Pershing Square Capital Management, a hedge fund returning 22% in 2007 betting on the demise of MBIA and Ambac Financial.

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Tuesday, January 22, 2008

Commodity model

Today I opened the first position in the new COM model, a ranking system based on commodities stocks that will replace HFCF in the Demo portfolio. I made this change based on the 6 months GSG momentum and the recent small cap underperformance. The 2008 Demo portfolio will thus be composed of NH, LKS, PCF, COM (5 positions each) and SHORT (10 positions). I might add a large-cap model going forward.

The idea for the COM model comes from the Motley Fool Mechanical Investing forums where the screen was originally designed as a commodity stocks universe sorted by low Short Interest ratio. I made a few changes to include my liquidity and cash flow requirements and replaced the regular SI as SI % of outstanding shares but for the rest the screen didn't change substantially. The goal is to overperform GSG in 2008.

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Friday, January 18, 2008

2008 Demo Portfolio

The 2008 Demo Portfolio lists all the real trades executed in one of my brokerage accounts net of commissions costs and YTD P/L. I generally update the spreadsheet on the same day orders were executed.

The first page of the spreadsheet shows the portfolio YTD P/L and the return for a benchmark I built based on a set of equity indexes. The portfolio includes 4 long and 1 short model rebalanced weekly, with each long model trading 5 stocks, for a total of 20 securities on the long side. The short model triggers a limited number of trades and is composed of around 8 stocks on average. Currently the funds allocation is 120% NAV long and 25% short, but I might change the allocation in the future according to market valuation.

All the models have been backtested on more than 8 years of data and include a post-discovery analysis period of 1/2 years. Each model universe is built based on a set of liquidity, fundamentals and price filters and the final candidates are selected applying a ranking system based on fundamental data. Tools that I use consist of a combination of freely resources available online, such as and, and commercial tools like and MathLab. The data used by is based on AAII weekly downloads, which consist of a revisited version of Reuters data (previously Mutex). Reuters is also the main data source for use data published by ValueLine.

HFCF (High Free Cash Flow) and NH (New Highs)
Both HFCF and NH are long momentum screens looking for stocks with good fundamental ratios and close to their 52-weeks highs. They are in facts very similar: HFCF has more stringent value rules selecting stocks with higher free cash flow then their industry peers; NH requires a positive 3 months and 6 months uptrend.

PCF (Price/Cash Flow)
This model can be described as a value mean reversion strategy looking for stocks with high operating cash flow and low debt and disregarding recent price action, thus in general favoring oversold stocks. I introduced the strategy in real trading in October 2007 after I had around 10 years of simulation available. So far it has been a disappointment but the entry time was bad given the recent market performances. I'll have to trust simulation data on this.

LKS (Less Known Stocks)
A large winner in 2007, this model seeks to anticipate large institutional moves in low-liquidity stocks, providing good factors diversification to the portfolio. I got the original idea by looking at the Reuters PowerInvestor screens (it still carries the same name) and then added some other insider trading and price/volume data rules.

This is by far the most complex model in terms of number of factors employed in the final ranking system. It was backtested for a period including 2003, a difficult time for short strategies. The model requires stocks with poor fundamentals and avoids short-term oversolds, thus limiting the selection to only a few names every month.

I am currently working on a number of new models to improve portfolio diversification. In particular I would like to add a Commodity and a Healtcare model to the set.

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6 Months Asset Class Monitor Updated

I added Global Bonds, Emerging Market Bonds and a Managed Futures fund (RYMFX) to the 6 months momentum monitor. I will keep the monitor updated as I intend to change my portfolio models accordingly.

Alt. ETF


Global BondsBND$71.87$78.328.97%

Managed FuturesRYMFX$25.56$27.055.83%

Emerging Mkt BondsESD$17.05$18.045.81%

Emerging MarketsEEM$130.86$132.331.12%

Large-Cap GrowthJKE$70.10$64.02-8.67%

World MarketsEFA$79.22$71.30-10.00%

Mid-Cap GrowthIWP$115.66$99.92-13.61%

Small-Cap GrowthIJT$143.23$121.86-14.92%

Large-Cap ValueJKF$88.93$73.62-17.22%

Mid-Cap ValueIWS$159.84$126.37-20.94%


Small-Cap ValueIJS$80.95$62.08-23.31%

Real EstateIYR$80.06$59.48-25.71%

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Thursday, January 17, 2008

6 Months Asset Class Returns

The following table shows returns from Mid-June (6 months) for some of the main asset classes and US value/growth segments. Commodities returned an impressive 21%, emerging markets are still positive after the last downturn:



Emerging MarketsEEM$130.86$135.283.38%

Large-Cap GrowthJKE$70.10$65.01-7.26%

World MarketsEFA$79.22$72.46-8.53%

Mid-Cap GrowthIWP$115.66$101.82-11.97%

Small-Cap GrowthIJT$143.23$124.14-13.33%

Large-Cap ValueJKF$88.93$74.97-15.70%

Mid-Cap ValueIWS$159.84$128.82-19.41%


Small-Cap ValueIJS$80.95$63.17-21.96%

Real EstateIYR$80.06$59.41-25.79%

Real-time updates here.

For 2008, I am going to introduce new Commodity and large-cap models. Also I am looking at ADR-based screens, given the relative strength of emerging and international markets.

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Friday, January 11, 2008

2007/2008 January Effect

This year the January trade returned a negative 0.34% before transaction costs for the period from 12/20/2007 to 1/9/2008: chart. Microcaps continued the downtrend that started in Q2: 2007 IWC:SPY chart.

Emerging markets on the other hand, are off to a good start in 2008 continuing a long-term uptrend vs. the US markets that started in 2000: here's a chart from 2005.

Wednesday, January 2, 2008

2007 Demo Portfolio Results (Revisited)

The Demo portfolio finished 2007 with a return of 17.62% net of transaction costs, for the 9 months from 4/1/2007 to 12/31/2007, well above the 9.63% benchmark results. I will continue trading the same model in 2008 and will keep the short model allocation to around 20-25% of the NAV to reduce portfolio risk.

The short model started trading at the end of August and so far has met my expectations despite a 145% loss in TMTA in October. Given the low capitalization of the stocks selected by the model, the risk of another TMTA going forward is high, but the simulation includes these jumps in the backtested results*.

*I checked the simulation log from 2/24/2003 to 1/7/2008 and found a total of 251 transactions for this 4.8 years period, averaging 47 calendar days holding period p/position or around 7 stocks per week. Contrary to what I thought initially, the highest simulated loss is only 35% for OPWV on 1/12/2004. Interestingly, OPWV is currently my best position carrying a 60% positive return from 8/2007.

This is a complete log of the highest simulated losses:

Symbol Open Close Days Pct
OPWV 12/29/2003 1/12/2004 14 35.40%
MDTL 9/17/2007 10/1/2007 14 33.76%
PRSF 12/22/2003 1/26/2004 35 27.44%
SSRI 1/18/2005 2/14/2005 27 25.23%
COSI 6/6/2005 6/13/2005 7 23.77%
MONE 7/26/2004 8/2/2004 7 22.28%
PRSF 12/22/2003 2/2/2004 42 22.26%
SYNM 11/7/2005 11/28/2005 21 21.44%
INPC 3/20/2006 4/10/2006 21 20.79%
MENT 12/29/2003 1/12/2004 14 20.24%