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Comment by H8crilA | Hacker News Reader

Long only is actually a pretty terrible choice if you want a "solid" portfolio with risk hedging.

I work in "tech" and I'm substantially net short "tech" as a hedge for potential layoffs, via options. Unfortunately I can't hedge via my employer's stock directly (like most companies my employer very explicitly disallows it, plus I'd be running a high risk of an insider trade accusation; I think it's understandable and acceptable).

A better idea might be to force people's allocation way ahead of time, say any change must be pre-announced 6-12 months ahead of time. That's how responsible executives (for example Bill Gates) sell their stock - via long term stock sale programs. Once signed - has to happen, whether good news or bad news.

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> Long only is actually a pretty terrible choice if you want a "solid" portfolio with risk hedging.

What if, in exchange for being one of the most powerful people in the most powerful nation on earth, you don't get to participate in the same wealth building schemes as everyone else?

Instead you get a hefty salary, and the people who say "Nah, I'd rather get rich in the stock market" are probably not the ones you want wielding all that power anyway.

I never quite understood how this is not obvious to everyone.

The primary driver and motivation for politicians should be altruism, do good for the sake of it. So many people in NGOs etc. are capable of doing just that; working for "the good" even though it pays bad, why should we not expect that from politicians?

The US (I'm Swiss) is in my opinion a primary example on why you want to keep the kind of people that care about their own personal finances as far away from politics as possible. Let them play real estate sharks or monopoly at wall street or whatever floats their boat; just don't let them anywhere close to positions where decisions are made that impact not just their life but everyone else's too.

Politics doesn't select for altruism. Politics requires lying, bribing and stealing so it's no wonder the very scum of the earth ends up in positions of power (same for most NGOs executives BTW). Power corrupts, so you will never be able to get altruistic individuals in power. You can't square that circle. The only solution is to severely limit their power.

Why do you think a position as an NGO executive selects for that? Executives in general, yes. NGOs too?

Because altruism alone doesn't get you special interest campaign financing and you gotta win first before you can do anything.

> The primary driver and motivation for politicians should be altruism, do good for the sake of it.

Any system that relies on people being good is a bad system. A good system is one that has good outcomes with weak and venal human beings. The US federal system has its merits but it’s far inferior to Switzerland’s.

> So many people in NGOs etc. are capable of doing just that; working for "the good" even though it pays bad, why should we not expect that from politicians?

Because the government is important. Ideally we want not the best of the people who are motivated by their conception of the good, we want the best, full stop. The average NGO is much less well run than the average company. At the extreme top level where you’re comparing the Gates Foundation with General Electric you’re dealing with at least roughly equivalent levels of competence but if you want the best and you can afford it you shouldn’t self handicap by only hiring those who don’t value money much.

Plenty of NGOs (charities and other humanitarian organizations) are also outright scams: https://smartasset.com/mortgage/the-50-worst-charities-in-am...

Altruism is complicated.

Plus, members of congress get a pension.

Yes, giving them more freedom would allow them to get more money.

But that isn't the objective. Allowing them to use only transparent, hard to game investments is offset by doubling or quadrupling their existing base salary. That is the trade off. Some will find other jobs because they want to become megarich. Fine, let them leave; others will be happy to run for their vacant office under the terms of the new deal.

Secondly, by investing only in bonds and broad index funds, their goal is to help the economy overall and in the long term. If someone is allowed to buy a ton of Lockheed stock, guess who they are going to steer projects to? If their money is parked in DJIA, to benefit themselves they should do what is right for a broad range of companies.

The DJIA is comprised of 30 companies, it’s not a very good option for this.

You’re missing the point. These people have (some, limited) control over the economy. Their financial incentives should be restricted to long-term, gradual growth only, so that they attempt to achieve that.

I understand, skin in the game. All I'm saying is that maybe it's a little restrictive, and perhaps not even working as intended.

It's pretty easy to cheat the system with a long only portfolio, if you're truly controlling the system: cause a deflation -> long treasures will be awesome (TMF just went +100% in the corona-crisis), cause inflation -> gold and maybe also stocks and real estate.

There's no single parameter that you can hook a leader to to assure progress. That's what voting is for. It is a very hard, very old, and probably impossible to solve problem: https://www.investopedia.com/terms/a/agencyproblem.asp

Things like this site from OP may work wonders. We need more disclosure and more pesky people prodding at leaders and executives, analyzing their every step. Journalism, serious journalism, even if done by non-professionals. Remember that since Markopolos & Madoff the SEC is giving substantial cash awards to whistleblowers (proportional to the penalty), which is fantastic. And they're paying out money all the time, so if you know of any fraud do yourself and the society some good: https://www.sec.gov/whistleblower

> It's pretty easy to cheat the system with a long only portfolio, if you're truly controlling the system: cause a deflation

Causing a deflation is very hard, unless possibly if you control the fed.

And that's for the government as a whole. I'd be very surprised if an individual senator can't affect that meaningfully.

Compare that to the current system where a senator hears about huge news that will move individual stock prices next week, and can easily make huge profits.

You agree with me that it's mostly about insider trading, not about skin in the game.

Deflation is not that hard, just dampen social security. Or stop half of military contracts and half of infrastructure spend. Or just go to the federal budget and do anything to reduce it by > 30%. You'll have a deflation (a recession) in a month, even before those changes actually go into effect.

> Deflation is not that hard, just dampen social security

classic HN backseat driver - everything is easy, "just" do XYZ.

The US federal budget is 21% of US GDP. Reduce it by 30%, that will cause a 7% drop in GDP and a deflationary recession. Reduce it by 50% and you have a 10% drop, very substantial. I really don't understand what's difficult about this.

You can also jack up taxes and start paying off govt debt instead of spending it on something new. Would have similar effects.

If you think I'm wrong please write why or post a link with some economic thought, would be curious to read.

The gist is that you will not be able to move the needle with any effectiveness. Reduce the federal budget by 30% by force of will, or what? This is "first, convert 1kg lead to 1kg gold" level thinking.

I agree. That's what I mean by "it seems to be more for you guys about insider trading than about skin in the game".

Edit: I think I understood it. You mean that broad, "macro-like" allocation would prohibit shenanigans with assets in narrower domains, like for example when a congressman successfully pushes a particular drugs-related law that has very big impact on a some particular pharma company. It is more realistic that they can change a single paragraph in some act than they can throw out 30% of the federal budget to "finally start paying back our enormous national debt".

My understanding is that it’s easy to start deflation. But it’s hard to stop deflation.

screws anyone with a loan / mortgage

> (like most companies my employer very explicitly disallows it, plus I'd be running a high risk of an insider trade accusation

I've not seen that before. How is the rule structured? Can you buy otm puts?

I can't really imagine that a formulaic program, established in advance and rigorously followed could possibly run afoul of insider trading rules regardless of your position at the company.

Something like: "In order to hedge my undiversified finical interest in X: While I am employed at X, on days A and B each year I will purchase 1 year puts with strike at 50% of the spot price (or the next higher price available) with Y% of my take home pay and either hold them until the expiration date, until they produce a return of Z, or the time of my choice if my pay is reduced or I stop working at X."

In addition to trading windows and material information rules, my company has a blanket rule that the company stock cannot be shorted nor can derivatives of any kind be used on it. Additionally it warns that this rule may also apply to ETFs containing a high enough proportion of the stock (leaving unspecified what the max allowed proportion would be, but noting that derivatives/shorting a total market index fund is allowed).

I'd recommend anyone who finds terms like that in an employment contract leverage it to try to negotiate for severance.

my company has the same rules, and i’d expect any publicly traded company that doesn't want to see their stock drop due to insiders activity or lawsuits against it would do the same.

i think it’s fair, you’re not restricted from trading other companies. this prevents unethical people from taking advantage of insider knowledge.

outside of c levels the average employee wont have enough stock to make this aplicable

I've never seen it before and I've seen the employment agreements for several fortune 500 companies-- though perhaps it's something that's only become common in the last ten years.

Obviously, restrictions on "restricted insiders" driven out of federal law exist... but I'm referring to restrictions that would prevent you from programmatically hedging your employment risks. You're not going to have an insider trading problem from such a program.

As far as fair goes-- it's fair if they compensate you for the loss of that freedom, otherwise it isn't. It's up to you to figure out what compensation is fair.

Employment is an extremely large undiversified risk. Through no fault of your own the company could go tits up with little notice, leaving you seeking new employment at the same time as many other people. Unemployment benefits are a rounding error for highly compensated employees. For good reason, you're generally prohibited from having alternative concurrent employment which would be the obvious way to reduce employment risk. It's prudent to take actions to hedge this risk. If the company takes one of the avenues off the table for that they it compensate you for or provide an alternative (like a good severance agreement).

You can easily protect your portfolio while being net long using uncorrelated asset classes like a blend of stocks and bonds, or even long inverse ETFs. Look into risk parity portfolios. No need to keep your foot on the gas and the brake at the same time.

Inverse ETFs are shorts, let's be real for a second :). And I'm well familiar with risk parity.

Bonds+stocks only doesn't protect you from stagflation (inflation up, growth down) or a depression (inflation around zero, growth down).

Bonds+stocks+gold only doesn't protect you from a depression.

Both a depression and a stagflation can easily last for over 5 years, so it should be taken seriously, IMHO.

Related: https://www.artemiscm.com/ (see the paper linked below; note that this is also a sales pitch from a long vol fund, so possibly it's a little too optimistic about the strategy).

You're wrong. Bonds protect against depression and index-linked bonds protect against stagflation.

Risk parity has not fared well in this crisis.

Risk parity doesn't come fare well when all correlations go to 1.

All correlations did _not_ go to 1. Volatility was amazing and certainly anti-correlated.

Risk parity's fatal flaw is assuming all instruments must be generating continuous profits.

Can you tell a bit more how you use options to hedge against a downturn in tech? Seems expensive.

On the contrary. For example, MSFT is currently trading at ~$165. A single MSFT Put option expiring on March 19, 2021, which gives you the right (but not the obligation) to sell 100 shares of MSFT at $165 at any time before expiry currently costs less than $20. So for $20, you can protect your $16,500 asset from a market downturn for a year. Also, options were significantly cheaper before the recent increase in market volatility.

You need to multiply that 20 with 100. It costs $2000 to protect $16,500.

You are correct, my math was way off. Buying ITM options is definitely not the best way to protect capital.

If it actually costed $20 everyone would be playing Taleb on much of their portfolios :). It is not cheap, and also not so easy to size everything properly. Hedging is not user friendly at all.

Robert Shiller often complains about the lack of general public awareness when it comes to hedging. Rationally, if you work in an oil company you should be short oil, but the opposite is much more common to be found in the real world. Similarly with real estate - if you have a big mortgage maybe you should somehow be short on the real estate market elsewhere, just in case your city becomes the next Detroit.

For those unfamiliar with it: options are usually quoted per-share (even though almost all of them are sold in contracts of 100 shares), because it makes calculating the break even price a lot easier. For a put costing $20 on a $165 strike, the break even at expiration is $145.

Also, you never buy long dated puts ATM in bull markets with the intention of hedging. It's usually much further OTM, since it becomes a lot cheaper. Right now all options are very expensive due to high implied volatility.

When the stock market is booming, buy puts on a major index.

SPY (S&P 500 index exchange traded fund) was around 335 in February.

Buy, cheaply a put (right to sell 100 shares) at a price of 300, expiring in 60 or 90 days, for about $150.

A couple of weeks ago, SPY was at 240. Sell the put, for a gain of at least (300 - 240) times 100 times delta (a description of relation of the option gain to the stock change) of about 0.60, for a gain of at least $3500 to $4500.

Do this 4 times a year times 10 years (last bull run) and you expire worthless 39/40 times for a net loss.

You wouldn't do it in the beginning of a bull run, only once it's been going for a decade plus.

Black swan events don’t wait for a 10-year bull market to occur first. You strategy might hedge against a market bubble (still very questionable), but what about all of the other things that can crash the market?

It's futile to try to make a strategy that will work 100% of time and still return the same or better than a non hedged strategy. If it's a black swan event, you won't be able to predict it by definition. I'm not sure what you're trying to argue.

https://en.wikipedia.org/wiki/Gambler%27s_fallacy

Except business cycles are a real thing

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