Sunday, January 24, 2016

Where are all the Jewish Momentum Traders?

Many would find financial research a curious pursuit. And while most curious financial researchers have their own peculiar or arcane interests, one area of modern finance continues to intrigue and mystify me: "Why are there so few Jewish momentum investors?" Now before the ADL or JDL launch a protes taking issue with this post before giving it a fair read, let me first clarify several points at the risk of spoiling my punchline. First, by way of full disclosure, I have strong affiliations with The Tribe itself (of Abraham that is) - and little to no affiliation with the Church of Serial Correlation (the Cult of Momentum) or The Turtle Traders. Second, despite the fact that I am an unashamed peacenik, frequent critic of Likud and the last two decades of much Israeli policy, I admire many Israeli's such as Amos Oz, Y. Rabin, D. Barenboim and Y. Beilin, the Jewish faith the Jewish faith, and many things The State of Israel has accomplished. This qualified and tepid opinion, however, does NOT - I repeat does NOT - in any way whatsoever make me anti-semitic. Third, and contrary to your suspicions, the accompanying image, as any native from Calgary might tell you, strangely enough has nothing to do with the Star of David, or Momentum. It is in fact a sheriff's badge presumably labelled to express disaffection over the "mess" and chaos their annual rodeo-related Stampede creates. But it does a nice job of visually marrying my seemingly unrelated subjects.

Having dispensed with formalities and belied critics who might impugn my credibility based upon THEIR politics, I will return to subject: the dearth of Jewish momentum traders. This puzzle initially gestated from meditations regarding the relative contribution of nature vs. nurture upon one's political beliefs. Proposing too much nature, it seems, is a contentious thought to some folk as I've discovered, for after espousing it, I've had people look upon me as puzzled and suspicious as if I were Kim Jong-Il doing a Liza Minelli impersonation, even though it's a quite innocuous observation. It goes like this. Based upon keen but anecdotal observation, populations seem to have roughly similar distributions of political archetypes between what one might broadly categorize as "progressive" or "conservative", irrespective of ethnicity, religion, or nationality of the entire population. Whether it's exemplified by Republican or Democrat, Labour or Conservative, Social Democrat or Christian Democrat there seems to be a rough equivalency in the percentages of these divisions in society. This seems to hold even if the specific ideological anchors have different coordinates in the political spectrum in different places. As other personality traits such as optimism and empathy have been shown to be strongly influenced by genetic predisposition, my probably unoriginal hypothesis by way of extension was quite simply: Why not politics? Perhaps everyone is born with a certain greater or lesser predispositon towards progressivity or conservatism, which themselves are possibly based a general affinity towards being receptive of, and embracing change (in the case of the progressive), or being cautious and suspicious of said change (as befits the conservative). The resulting conclusion: people underestimate the role of such genetic predisposition in political belief structures, in general, and in their own idelogical make-up in particular. While I am not an anthropologist nor a sociologist there are many examples of similar less-than-physical pre-disposed traits in relatively consistent proportions across varied populations (e.g. homosexuality). And while learned people who have studied this are not necessarily in agreement as to which competing theory best explains WHY the phenomena exists, there is little disgreement over the existence of the objective phenomena itself. This is NOT meant to disavow or diminish the influence of nurture, or to discount free will of the spirit which both have a role. But it is interesting, if not uncomfortable, to speculate that we may not be as free as we would like to believe.

Teleport now to what was the floor of the CBOT or the CBOE where, mixed amongst the overly-tall brokers and traders, were speculators of many persuasions. Scalpers, market-makers, front-runners, discretionary liquidity providers, strategic traders, trend traders, and counter-trend traders, some disciplined, some emotional some visceral or instinctive. But here too there seems to be similar archetypical personality divisions: that of the "trend-trader" or "counter-trend trader". One can also think of it as momentum-oriented or reversion oriented (or short-premium option traders vs long-premium option traders for our derivative friends). Might not genetic predisposition have a similar role in whether one felt more comfortable "riding a trend" or "or trying to anticipate a reversal"? Or in "buying a breakout" or "fading a pop"?? Or "Buying growth" or "buying value"? After all, these dichotomies are essentially attributable to the inherent optimism vs pessimism, or safety vs. adventuresomeness which we already have good reasons to believe are strongly influenced by nature.

Whether one agrees or not at this point, I hope you'll see a consistency and logic to this thread so far, that, if not probable, is at least plausible. Now comes the puzzle: if the general population consists of some relatively consistent distribution of, for simplicity's sake, "momentum-traders" and "reversion traders", why does there seem to be such an asymmetrical distribution specifically amongst the Jews? It's certainly not for lack of prowess at making money. Trading is in our blood and has been since our days refueling camels at the Judean cross-roads of civilisation. As a tribe, we account for some of the greatest value investors, but we seemingly can't ride a trend. Even Sol Waksal for example, whose company has the ultimate momentum theme - a cure for cancer, felt compelled to trade his position lest it's value be [temporarily] knocked by some petty little FDA concerns about experimental design. Few would argue that we are over-represented in the world of arbitrage, but under-represented amongst the great CTA's. Or that we have a keen eye for spotting and picking up the four-cent nickels, but have more difficulty sticking around to turn $1 dollar in $10. I could be way off base, but I think there is a pattern here. Is it something peculiar to "us" or is there something about momentum? Maybe it's just the "feel of it"? Or maybe it's the risk vs. reward proposition that is intuitively (or objectively) unappetizing? Or perhaps momentum requires something more of the mind or spirit, something that we simply cannot give?

It would be useful at this stage to better define "momentum". Though I am no expert on the subject, it may be helpful to separate it into different categories. One is "naive momentum" which is quite simply using past returns to predict the future direction of returns. "What's gone up will keep going up". What is outperforming will (hopefully) keep outperforming. For academics analyzing the stock market's cross-section of returns, this phenomena is typically viewed as relative in nature, or normalized performance ranks. Through this lens, persistence in relative return has been found to exist for as yet undiscovered and undiscernible reasons, confounding theorists - especially those espousing market efficiency. But the real Momentum-Men (and they ARE men as not a single famous woman springs to mind), are the practitioners that call themselves "trend-followers" and would perceive themselves as more sophisticated and discriminating than the naive crowd. Here, simple moving averages give way to complex pattern matching techniques and endlessly catalogued contingency tables - all integrated systematically to find the holy financial grail which will allow them to distill the real trend that has the higher probability of persisting and thus being the motherlode that will take an ounce of gold that broke out from $454 to the stratospheric price of $5,000/oz (or beyhond!). This is a periodically prerequisite necessary to pay for for all the shakeouts, false starts, and ubiquitous reversals that are the by-product of the financial equivalent of chaos. That a number of practitioners have been reasonably (if not fabulously) successful employing these methods would seem to indicate that one dismisses them at their peril. Yet, others employing quite similar methods have crashed and burned spectacularly. But there is no shame in making (and losing) a fortune, for aside from being an adventure, it generates notoriety. And with such fame (infamy might be more accurate), one can always write a book, or post his musings on a website, or teach others to trade using trend-following techniques (but hopefully a more complete set than they used - one that incorporates counter-measures against periodically going nuclear). But perhaps the most amusing description of something with momentum was by Leif Ericson (on Peter Greenfinch's website) which he posited "was the battle between those with more money than intelligence against those with more intelligence than money.

Indeed, momentum has its uses, and has made some people (particularly brokers and exchanges, as well as some investors and traders) fabulous amounts of money. But it's not for the faint-hearted, and not without large and attendant risks. But that still doesn't answer why Jews are under- or unrepresented here. What's preventing them from joining the search for the leprechaun with real potfulls of gold at the end of the rainbow for the lucky few?

For a start, it seems that being long momentum requires faith. Similar in nature to the good old-fashioned bible-thumping fire-breathing kind. But faith in what? It's difficult to say just what that something is, and theoreticians remain perplexed. One might say it's essentially faith that the future bias of returns will continue to resemble the past. But is this wise or even accurate? It's not a bad bet with respect to things like whether the sun will tomorrow, whether the leaves will turn color this autumn, or whether the government will suddenly feel geneorous and abolish tax. And it's not unreasonable have some more-then-ambivalent confidence in a directonal movement when something is converging towards some probable equilibria. But the odds and thus confidence intuitively diminsh as one moves farther from equilibria (assuming one has a reasonably accurate estimate of probable equilibria). Consequently, risk increases. By contrast, it is "doubt" which comes easy to us Jews. Faith comes much harder. We desire proof. We NEED proof. A Covenant, for example, would work well. As would a burning bush, or some directives or commandments carved in stone. Recall, God had to crack the whip many times before people were convinced. And it took lots of smiting. And even then, there was backsliding. Moses was skeptical at first and took multiple minor demonstrations of transmutation to convince him. And I would guess that when he took his demands to the Pharoah, he probably had his doubts. At least until Pharoah's kingdom was over-run by toads. That was his nature - to doubt.

Maybe we eschew Momentum because we're just contrarians? While it's true that we are always up for a good debate, it is unfair to say that we are contrarians for the sake of it or just for kicks. Having said that, one must remember that we are wary of crowds as historically, when we Jews have seen the crowd coming, it was time to leave. And fast. Over the generations it's become burnished in our minds. But suspicion of the herd is not pathological. When there is sale on, we are the first to queue up and often lead the stampede. No obvious contrarianism there. And one must not forget that the God of the old testament is severe. He can (and often did) take away what he'd bestowed, not to mention the ever-present threat of smiting. Momentum needs time, and these things in combination have always made time an issue for us which, while it makes us good bankers, does put some behavioural boundaries upon our holding period. The old saw "One in the hand is worth more than two in the bush", would take on special meaning if one not might be around to collect.

Jews are studious, value education, and usually pretty rigorous. The faith required of a momentum investor resembles closing one's eyes when taking risk. We are used to and not shy of taking risks, but they are typically calculated risks. Like the risk of taking that "Home Office Deduction" against our income tax. We can do the math. But we disapprove of pure gambles. When was the last time you a saw one of our tribe win a large Pick-6 jackpot?!? Or when was the last time your Jewish friend invited you to go the racetrack, or wager on the greyhounds? We intuitively know lotteries are poor odds. That's why when we went to Vegas, we would rather "be the house" and "be paid" than "pay the house" and be played. When we do go to casinos as a customer its for the free drinks, and not for thrill of trying our luck against the odds. We prefer investment to speculation. At least with an investment, one can estimate probabilities and calculate expected returns. And hedge. Only then do we pray. And when we pray, we pray to God not for "good luck" but rather that the hedge holds.

Without being disparaging, momentum is useful as a discipline for people who have no other. And some form of discipline is better than none. We've an inherent intellectual flexibility which in investment terms is important in order to integrate new information and fight against hard-to-overcome cognitive biases. Maybe that's because we've always been moving and have had to learn the ways of new people and places. Unlike the way many conservative strict-constructionists in America prefer an ossified constitution, or the way fundamentalists of all religious persuasions strictly interpret their religious texts, Jews are constantly re-examining and re-interpreting the meaning of their scripture (amongst other things). Trend-following is a disciplined system that proxies for intelligence-derived flexibility. It dictates change in response to something, even if that something is facile, and often ill-logical, and frequently uneconomic. Our nature results in a demanding need to know "why" and to reach our conclusions by way of intellect, rather than faith. This creates decision flexibility (to react to, or incorporate change) which inhibits belief anchoring without sacrificing understanding.

Or perhaps we're just not optimistic enough to "close our eyes and buy"? It seems that most momentum traders are optimists by nature. Optimistic in their belief market solutions are always better. In conservative republicanism. In low taxes. I would not deny the suggestion that as a people we are not renown for our positivism. Not in art, literature, nor psychiatry. But in finance, optimism is independent of, and should not be confused with, momentum. Sometimes there is good reason to be optimistic about the direction of price movement, and sometimes not. And while I would agree that optimism serves many useful functions in the human struggle for survival, it's been shown by researchers that pessimists perception of objective reality is in fact closer to objective reality. Optimism is an important tool in sports, healing the mind and spirit or achieving personal goals, but it cannot and will not move market prices. Full stop. Objective reality (or at least reasonably accurate perception of reality), on the other hand, is extremely useful and of paramount importance when assessing probabilities, making expected return calculations, or discerning the sign and location of the fat tail..

What is the final take-away? Though untested, and unproven, the asymmetry seems to result from an unusually strong combination of natural predisposition towards progressivity inherent in our genes coupled with a multitude of social nurture factors emanating from our idiosyncratic history, religion and culture, all which reinforce our predilection for value and the counter-trend. This is not to discount the potential contributions momentum can make. But that doesn't mean we have to like it, or for that matter, pursue it, which in aggregate, we apparently don't. After all, no one really "likes" insurance, but we still buy it....

(NB: This was first published in 2005 - well into the last momentum cycle, but nonetheless a few years early in its veiled critique of momentum's popularity amongst investors)


Sigmund said...

So, if I find myself nodding along with this post, agreeing wholeheartedly that momentum is a discipline for the lazy and feeble minded fools who can't possibly deserve the riches they've reaped in the bull phase, does that make me an honorary Jew? If I only buy wholesale do I have to stay kosher? Can I start working Yiddish phrases into my conversations? If I put on the occasional momentum trade and it always seems to mark the end of the trend can I joke that at least I'll have something to do between Rosh Hashanah and Yom Kippur?

vlade said...


Firstly, I'm glad you're posting a bit more (two in a month!), hope it lasts..
Secondly: TBH, I'm not that sure that Jews are not momentum traders. But maybe we'd redefine momentum? For example, the history is full of Jewish advisors to the courts - Christian and Muslim. What else is locking your fortunes to a monarch (especially some of the early caliphates in Spain) than trend following (with the monarch's luck being the trend). HaLevi and Grenada (who even bet his family on the trend, and unfortunately his son lost..) may be the most extreme example in history, but "court Jew" was a common enough phenomena. Ah, I hear you say "but they broke from the momentum, see Rotschilds, Seligmann etc. ". Yep, but it took a few hundred of years of education by trial and failure. That means we'd give today's momentum traders a bit more of a slack..

On the third thought, maybe this is it - that Jews were THE momentum traders (since both rewards and risk with this type of momentum for them was vastly larger than for anyone else), and found the hard way that the steamroller ultimately always comes, so it's not worth it long term.

Anonymous said...

You are political correct, let's puke- I stopped reading at the top when you bent over backwards, try just saying what you mean.

isomorphismes said...

Well, Cliff Asness is Jewish, and was afaik one of the original hard-headed momentum investors

"Cassandra" said...

Vlad - Tnx for sharing your thoughts. I think there is truth in how you approach it. The Tribe (not the Turtles) have historically been adept traders. And to the extent that playing momentum - being adept at exiting before the momentum crashes - pays, whether sociologically, or in the market, then I take your point. The post was thinking of momentum in the narrower sense of informationless trading on past absolute or relative outperformance. From this perspective, I'd stick by my general view that The Tribe's inherent skepticism makes us ill-suited for THAT pursuit, and better arbs or value investors.

As for Cliff Asness, I readily admit that I could be mistaken, but I thought Cliff & AQR only got the [momentum] religion AFTER the 45% pasting-of-a-drawdown they received into the great Y2K chasm between internet/tech "growth" and everything else. You could NOT have been a momo guy and suffered that indignity - even with what has proved a roughly optimal allocation of 1/3 momo 2/3 reversion. You had to have been short the momentum factor writ-large, or way long value in all its forms to achieve that. To his credit, he stuck with his [ultimately correct] convictions and pounded the table to [our mutual] investors about the increasing forward-looking expected returns
as this spread widened to excruciating levels. Moreover, he was able to articulate The Case for sticking with AQR and The Trade effectively enough that he was not put out of business the way lesser mortals were, and so was able to recoup the drawdown enroute to building AQR into what it is today. Again, I could be wrong, but the extensive momo research, and it's deployment I reckon was a "never let that happen again" response. So as a scientist, he is doing what works, and that's fine. But even amongst those of us that don't deny evidence, many in The Tribe still demand more definitive explanation as to 'Why", and this is still definitively lacking in the finance literature. And, speaking for myself, without the "why", momentum remains religion, and I, remain an apathetic agnostic.

Vasastan said...

For a discussion of the genetic base of political views, I recommend Steven Pinker's The Blank Slate. It is an excellent book, but will not endear you to your "nurture"-preferring friends.

Regarding momentum, or indeed any other "style", I find that rigorous adherence can also be used against known deficiencies in my trading. A person finding that he often has too many large-caps in his portfolio, for example, could benefit from a strict rule forcing a certain value to be held in small companies.