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Notes from UTIMCO 20th Anniversary Event
March 3, 2016
John Burbank, Passport Capital:
[~Minute 9] Markets' ability to discounting future overrated. Markets do a bad job of seeing
recessions until they're obvious. Last two years have seen liquidity deteriorate in advance of that
Views: macro, bottom-up and quant/risk (regression to mean and flows)
Quant is the most active trading strategy in the markets now, creating lots of changes in
Quant: basically reversion to the mean in levered market neutral way
Lot of quant blow-ups going on right now
Sophisticated quants, like Renaissance, will produce alpha in ways that they don't tell you about
Smart beta has legitimized a lot of leverage
Commodity equities: ratings, earnings estimates are bad and stale. They are the fundamental
input into a lot of quantitative strategies (ie. P/E, P/B). In reality companies could be close to
Quant is making this market a lot more volatile and tactical
"This is a bear market"
Future 3-5 years from now will be unrecognizable from today
Globalization, lack of liquidity, amount of information, levels of debt, demographics: world will be
unrecognizable/unanticipated consequences
Focus now: lack of liquidity
Need to change how you invest now (not from a fundamental point of view): do you have enough
liquidity for set of circumstances which may be complete opposite to what you think
Has nothing to do with fundamentals
Liquidity sets the multiple of a security
2013 was best year in QE regime - most liquidity
Unless policy makers provide liquidity, will see much lower multiple - even if growth/earnings are
Don't think earnings will be okay because rising dollar, end of QE. Six years of QE held dollar
down, world borrowed in dollars
Dollar will keep going up, tightening of global liquidity. Happened in 1980s, 1990s. Broke Latin
America in the 1980s - Plaza Accord avoided crisis. Broke EM in 1990s
Big parts of the market that you can't sell: HY, EM credit, EM equities barely
Only differentiator in the future: human capital. Clustered in very few places, select cities
Was long EM and commodities 10 years, until 2011
Only real long: scaling and formation of human capital
Don't believe in world growth: we have too much debt and are too old. Policy makers won't get
this one right
Negative rates: tried in Japan. Market screamed, banks traded down
Obvious solution: fiscal stimulus. Won't happen in US this year
Global market won't be good unless the dollar comes down

[Minute 24:30] On using quantitative, factor-based risk management

Like having three advisors at the table. When two agree it's more powerful. Sometimes only one
can be the reason not to do something
Took a long time, most equity people not trained in risk
Like speaking a different language
Look at portfolio: ie. how much exposure to momentum factor

Measuring and monitoring quant investment universe: like watching a professional sports league
Knowing the flow is significant as it presents tail/headwinds and helps distinguish noise and
80% of trading is HFT
Since 2007: move into ETFs has been staggering. Market is getting stupider
Sell-side has less incentive and interest in good estimates
Trading being done by people who don't do work
"Fundamental guys are like the head of the snake. Sometimes the head carves the path for the
body, sometimes the body is making the head go all over the place, which is basically right now"
[Minute 28:] QE that was done was a mean reversion trade. Now seeing disaggregation/unfolding
of that mean reversion trade into the liquidation trade. Do things get liquidated or do policy
makers change course from negative rates, which is an even dumber idea, towards liquidity and
Right now markets rallying into ECB, China, Fed in hope for better ideas
Learned a lot about monetary theory, pretty simple: I give you cash, I take your best collateral,
done. That's what they did, that was their best idea [QE]
Next best idea: negative rates. Rejected by the market
Will they come up with something else? US needs tremendous infrastructure spending. Don't see
how it will happen this year. In between will go up and down on the hopes for liquidity