Literature

Below are a number of journal articles and books that are recommended reading for investors seeking to understand more about 36 South's investment approach, and volatility in particular. Please contact us if you would like any more information.


Tail Risk Hedging: Theory and Practice

This is the first ever edited volume on tail risk hedging, which can serve as a primer and an authoritative guide for institutional investors.  Edited by leading experts in the area Andrew Rozanov and Ryan McRandal, based at Permal and AXA respectively, the book brings together a representative cross-section of views from practitioners who are active in the space.  Chapters include:

-    An Introduction to Tail Risk Hedging
-    Strategic Tail Risk Management: a Pension Fund’s Perspective
-    An Asset Allocator’s Approach to Tail Risk Hedging
-    A Systematic Approach to Tail Risk Hedging

Tail Risk Hedging: Theory and Practice
Rozanov, Andrew and McRandal, Ryan (Eds)
Risk Books, 2014


The Kelly Capital Growth Investment Criterion

This volume provides the definitive treatment of fortune's formula or the Kelly capital growth criterion as it is often called. The strategy is to maximize long run wealth of the investor by maximizing the period by period expected utility of wealth with a logarithmic utility function. Mathematical theorems show that only the log utility function maximizes asymptotic long run wealth and minimizes the expected time to arbitrary large goals. In general, the strategy is risky in the short term but as the number of bets increase, the Kelly bettor's wealth tends to be much larger than those with essentially different strategies. So most of the time, the Kelly bettor will have much more wealth than these other bettors but the Kelly strategy can lead to considerable losses a small percent of the time. There are ways to reduce this risk at the cost of lower expected final wealth using fractional Kelly strategies that blend the Kelly suggested wager with cash. The various classic reprinted papers and the new ones written specifically for this volume cover various aspects of the theory and practice of dynamic investing. Good and bad properties are discussed, as are fixed-mix and volatility induced growth strategies. The relationships with utility theory and the use of these ideas by great investors are featured.

The Kelly Capital Growth Investment Criterion: Theory and Practice
Leonard C MacLean, Edward O Thorp and William T Ziemba
World Scientific, 2011


No Risk

In his quarterly risk management research report Alexander Ineichen discusses his view on various aspects of the world, politics, the ecomony and risk including whether investors need to hedge, lessons learned fom sand pile games and forest fires that are ignored and his macro perspective on individual countries throughout Europe, America and Asia.

No risk
Alexander Ineichen
Ineichen Research and Management
October 26, 2012


Warning: Physics Envy May Be Hazardous To Your Wealth

The quantitative aspirations of economists and financial analysts have for many years been based on the belief that it should be possible to build models of economic systems - and financial markets in particular - that are as predictive as those in physics. While this perspective has led to a number of important breakthroughs in economics, "physics envy" has also created a false sense of mathematical precision in some cases.

Warning: Physics Envy May Be Hazardous To Your Wealth
Andrew W. Lo and Mark T. Mueller
Journal of Investment Management
Vol 8, No 2, (2010), pp 13 - 63


This Time is Different

Throughout history, rich and poor countries alike have been lending, borrowing, crashing--and recovering--their way through an extraordinary range of financial crises. Each time, the experts have chimed, "this time is different"--claiming that the old rules of valuation no longer apply and that the new situation bears little similarity to past disasters. With this breakthrough study, leading economists Carmen Reinhart and Kenneth Rogoff definitively prove them wrong. Covering sixty-six countries across five continents, This Time Is Different presents a comprehensive look at the varieties of financial crises, and guides us through eight astonishing centuries of government defaults, banking panics, and inflationary spikes--from medieval currency debasements to today's subprime catastrophe. Carmen Reinhart and Kenneth Rogoff, leading economists whose work has been influential in the policy debate concerning the current financial crisis, provocatively argue that financial combustions are universal rites of passage for emerging and established market nations. The authors draw important lessons from history to show us how much--or how little--we have learned.

This Time is Different: Eight Centuries of Financial Folly
Carmen M. Reinhart & Kenneth S. Rogof
Princeton University Press, 2009


Lecturing Birds on Flying

An intriguing look at how financial models have repeatedly failed our markets, including how leading and contrarian thinkers have been talking for years about the conflicts between theoretical and real finance. Nassim Taleb first addressed the issue in his technical treatise on options, Dynamic Hedging. Now, in Lecturing Birds on Flying, Pablo Triana moves the conversation to a narrative that anyone can follow, and explains how it is that theoretical finance can fail dramatically in the real world. The heart of the book, though, isn′t about technicalities, but instead explores how widely accepted theories that are applied daily cause our world real harm. Many times, it′s the quantitative models that hedge funds and investment banks use (and regulators and rating agencies embrace) that lead to market implosions. These so–called models end up offering false guidance and misplaced certainty, and sanction unsavory behavior. In fact, these models were largely responsible for the stock market crash of 1987, the LTCM crisis of 1998, the credit crisis of 2008, and many other blow–ups big and small. Pablo Triana has been writing about the limits of these types of mathematics for several years; now he reveals exactly what this means for our markets and why blind self–enslavement to quantitative dictums puts us at great peril. Pablo Triana (New York, NY, and Madrid, Spain) has successful derivatives experience at all levels: trading floor, professor, consultant, and author.

Lecturing Birds on Flying: Can Mathematical Theories Destroy The Financial Markets?: How Financial Practice Differs from Theory
Pablo Triana
John Wiley & Sons, Inc., 2009


Quantitative Trading

While institutional traders continue to implement quantitative (or algorithmic) trading, many independent traders have wondered if they can still challenge powerful industry professionals at their own game? The answer is "yes," and in Quantitative Trading , Dr. Ernest Chan, a respected independent trader and consultant, will show you how. Whether you′re an independent "retail" trader looking to start your own quantitative trading business or an individual who aspires to work as a quantitative trader at a major financial institution, this practical guide contains the information you need to succeed.

Quantitative Trading: How to Build Your Own Algorithmic Trading Business
Ernest P. Chan
John Wiley & Sons, Inc., 2009


Volatility Trading

In Volatility Trading , Sinclair offers you a quantitative model for measuring volatility in order to gain an edge in your everyday option trading endeavors. With an accessible, straightforward approach. He guides traders through the basics of option pricing, volatility measurement, hedging, money management, and trade evaluation. In addition, Sinclair explains the often–overlooked psychological aspects of trading, revealing both how behavioral psychology can create market conditions traders can take advantage of–and how it can lead them astray. Psychological biases, he asserts, are probably the drivers behind most sources of edge available to a volatility trader. Your goal, Sinclair explains, must be clearly defined and easily expressed–if you cannot explain it in one sentence, you probably aren′t completely clear about what it is. The same applies to your statistical edge. If you do not know exactly what your edge is, you shouldn′t trade. He shows how, in addition to the numerical evaluation of a potential trade, you should be able to identify and evaluate the reason why implied volatility is priced where it is, that is, why an edge exists. This means it is also necessary to be on top of recent news stories, sector trends, and behavioral psychology. Finally, Sinclair underscores why trades need to be sized correctly, which means that each trade is evaluated according to its projected return and risk in the overall context of your goals. As the author concludes, while we also need to pay attention to seemingly mundane things like having good execution software, a comfortable office, and getting enough sleep, it is knowledge that is the ultimate source of edge. So, all else being equal, the trader with the greater knowledge will be the more successful

Volatility Trading
Euan Sinclair
John Wiley & Sons, Inc., 2008


The Ascent of Money

A richly original look at the origins of money and how it makes the world go 'round Niall Ferguson follows the money to tell the human story behind the evolution of our financial system, from its genesis in ancient Mesopotamia to the latest upheavals on what he calls Planet Finance. What's more, Ferguson reveals financial history as the essential backstory behind all history, arguing that the evolution of credit and debt was as important as any technological innovation in the rise of civilization. As Ferguson traces the crisis from ancient Egypt's Memphis to today's Chongqing, he offers bold and compelling new insights into the rise- and fall-of not just money but Western power as well.

The Ascent of Money: A Financial History of the world
Niall Ferguson
The Penguin Press, 2008


More Than You Know

If everyone had read this book, the GFC may never had happened. Delves into a wide range of topics, mainly behavioural economics, and very efficiently espouses a new mind-set with which to approach common investing paradoxes.

More Than You Know: Finding Financial Wisdom in Unconventional Places - Updated and Expanded
Michael Mauboussin
Colombia Business School Publishing, 2008


Forecasting Volatility

In Forecasting Volatility Stephen Figlewski puts together results from several lines of research that he has pursued over a period of years, on the general topic of volatility forecasting for option pricing applications. This article is very helpful to illustrate the flaws and difficulties that are inherent in option pricing applications that are commonly used.

Forecasting Volatility
Stephen Figlewski
New York University Stern School of Business
April 24, 2004


Forecasting Volatility in Financial Markets: A Review

Volatility forecasting is an important task in financial markets, and it has held the attention of academics and practitioners over the last two decades. Ser-Huan Poon and Clive Granger have in “Forecasting Volatility in Financial Markets: A Review” documented the work that has been done in 93 published and working papers on the performance of various volatility models. This extensive research reflects the importance of volatility in investment, security valuation, risk management, and monetary policy making.

Forecasting Volatility in Financial Markets: A Review

Ser-Huang Poon and Clive Granger
Journal of Economic Literature
Vol. XLI (June 2003) pp. 478–539


Power Laws

In this sequel to "The 80/20 Principle", the author reveals how things really work - the universal, powerful patterns in nature, society, organizations and markets, the power laws - that can be applied successfully to life and business today. Drawn from every element of the sciences, these Power Laws - from Natural Selection to the Theory of Relativity, from the 80/20 Principle to the Tipping Point - provide clues as to how the world operates, enabling us to trace truly universal and powerful patterns, which generate insights into business. By understanding and applying them, ideas about how to be successful can be generated. Richard Koch shows how to use these Power Laws to identify and exploit business opportunities; to please the right customers; to shed light on the nature of competition; how to beat - and co-operate with - competitors.

Power Laws: The Science of Success
Richard Koch
Nicholas Brealey Publishing, 2000


Twentieth century volatility

In Twentieth century volatility Alexander Ineichen illustrates what caused equity market volatility in the twentieth century and how difficult it is to predict future volatility. An exellent article that reminds any investor that it is easier to manage risk than trying to guess what the future might hold.

Twentieth century volatility
Alexander M Ineichen
Journal of Portfolio Management; Fall 2000; 27, 1


Volatility Exposure of CTA Programs and Other Hege Fund Strategies

Marc Malek and Sergei Dobrovolsky point out fine differences in volatility exposure in CTA Programs and other Hedge Fund Strategies. With research that is based on their own Managed Futures Fund it is easy to unterstand that CTA Strategies provide investors with exposure to long gamma, as trend following position entries are similar to changing delta’s of long gamma options positions.

Volatility Exposure of CTA Programs and Other Hedge Fund Strategies
Marc Malek & Sergei Dobrovolsky, CFA
Conquest Capital Group LLC
August 2006


The recent behaviour of financial market volatitily

A striking feature of financial market behaviour in recent years has been the low level of price volatility over a wide range of financial assets and markets. The issue has attracted the attention of central bankers and financial regulators due to the potential implications for financial stability. This paper makes an effort to shed light on this phenomenon, drawing on literature surveys, reviews of previous analyses by non-academic commentators and institutions, and some new empirical evidence.

BIS - The recent behaviour of financial market volatility
Monetary and Economic Department
August 2006


VIX as a Companion for Hege Fund Portfolios

In 1993, the Chicago Board Options Exchange introduced the CBOE Volatility Index, VIX, and it quickly became the benchmark for stock market volatility. VIX measures market expectations of near term volatility conveyed by stock index option prices. Since volatility often signifies financial turmoil, VIX is often referred to as the "investor fear gauge". In VIX as a Companion for Hedge Fund Portfolios the authors Srikant Dash and Matthew Moran outline the advantage of combining an investment in implied volatility (options premiums) to portfolio’s of Hedge Funds.

VIX as a Companion for Hedge Fund Portfolios
Srikant Dash and Matthew Moran


The new CBOE Volatility Index - VIX

In 1993, the Chicago Board Options Exchange introduced the CBOE Volatility Index, VIX, and it quickly became the benchmark for stock market volatility. VIX measures market expectations of near term volatility conveyed by stock index option prices. Since volatility often signifies financial turmoil, VIX is often referred to as the "investor fear gauge". This article is an exellent guidebook to how the VIX works. It becomes evident that the VIX is an instrument for trading and hedging and not a long term investment, due to its mean reverting characteristics.

VIX White Paper – The new CBOE Volatility Index – VIX


The Black Swan: The Impact of the Highly Improbable

Nassim N. Taleb is fascinated by the rare but pivotal events that characterise life in the power-law world. He calls them Black Swans, after the philosopher Karl Popper's observation that only a single black swan is required to falsify the theory that "all swans are white" even when there are thousands of white swans in evidence. Provocatively, Nassim N. Taleb defines Black Swans as events (such as the rise of the Internet or the fall of LTCM) that are not only rare and consequential but also predictable only in retrospect

The Black Swan: The Impact of the Highly Improbable
Nassim N. Taleb
Random House & Penguin UK, 2007


Fooled by Randomness: The Hidden Role of Chance in the Markets and Life

This book is about luck perceived and disguised as nonluck (that is, skills), and randomness perceived and disguised as nonrandomness (that is, determinism). It manifests itself in the shape of the lucky fool, defined as a person who benefited from a disproportionate share of luck but attributes his success to some other, generally very precise, reason.

Fooled by Randomness: The Hidden Role of Chance in the Markets and Life
Nassim N. Taleb
Random House,2005


The (Mis)Behaviour of Markets: A Fractal View of Risk, Ruin and Reward

Benoit B. Mandelbrot, one of the century's most influential mathematicians, is world-famous for making mathematical sense of a fact everybody knows but that geometers from Euclid on down had never assimilated: Clouds are not round, mountains are not cones, coastlines are not smooth. To these classic lines we can now add another example: Markets are not the safe bet your broker may claim. In this book he shows how the dominant way of thinking about the behavior of markets - a set of mathematical assumptions a century old and still learned by every MBA and financier in the world - simply does not work.

The (Mis)Behavior of Markets: A Fractal View of Risk, Ruin, and Reward
Benoît Mandelbrot and Richard L. Hudson
Basic Books, 2004


Why Stock Markets Crash: Critical Events in Complex Financial Systems

Sornette reviews major stock market crashes and concludes that the underlying cause can be sought months and even years before the abrupt, catastrophic event in the build-up of cooperative speculation, which often translates into an accelerating rise of the market price, otherwise known as a "bubble."

Why Stock Markets Crash: Critical Events in Complex Financial Systems
Didier Sornette
Princeton University Press, 2003


Traders, Guns & Money: Knowns and unknowns in the dazzling world of derivatives

Das Satyajit sardonic description of the derivatives industry provides an extremely entertaining approach to a genre saturated with glorified good fortune and dire warnings of imminent market apocalypse. This book provides insights to the world of structured products and accurately makes the link between derivatives and their impact on financial markets.

Traders, Guns & Money: Knowns and unknowns in the dazzling world of derivatives
Satyajit Das
Financial Times/ Prentice Hall, 2006