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Which hot stocks worked? Which didn’t? Lessons. What the heck is a variance swap. Do we want one?

This chart shows the performance of several of our stocks over the last two years.

Eye how dramatically different the performance is. Top is ENPH. Second top is TSLA. And that’s despite their recent pullbacks. Who could have figured?

The lessons I can pull from this: It’s hard. Diversification pays. Hot stocks work.

The good news is they’re all up. But some, not much. Draw your own lessons. And, don’t get clever or desperate — see below.

Apple’s event yesterday did not move the needle — at least for me.

It was Apple’s first event of the year. It introduced the new iMac, iPad Pro, iPhone 12 in purple, AirTag, and Apple TV 4K. To me, the neatest devices were the two new iPad Pros — especially the mammoth 12.9 inch model. The new iPads are faster, brighter, stronger and have oodles of features for developers, videographers, movie makers, etc. I want to see the new screen. It’s apparently awesome and more than twice as bright as my new laptop. I’m probably not talented enough to use the new iPad Pro.

Apple stock was down 1.3% yesterday. You can watch the event here.

To me, the biggest thing about all the new iPads and the new laptops — Apple and Windows — is that you can now easily get hard discs that are one and two trillion bytes. That’s huge and easily large enough for your entire life. The laptop I’m typing this blog on has 74% of its trillion bytes still free for me to load up with the kids pictures up to and including their weddings. Of course, I won’t be alive by then. But it’s a nice thought.

More tips

+ Washing machines need rebooting (a.k.a. re-setting). Google your make and model number for how to do it. If you thought Windows was bad, you ain’t seen nothing yet. Thank you Whirlpool.

+ Turn off Auto-Correct on your phone. It messes your emails and texts. Let it suggest an alternative, but don’t let it force it.

+ If your laptop screen flickers, you probably need new updated drivers from your maker.

+ It’s nice to run your life on a laptop with three external screens.

Left is Fidelity’s Active Trader Pro. Center is Google’s Chrome browser with 82 open tabs. On the right is my Outlook inbox and when I’m on Zoom, it shows a full screen of the speaker. The multi-screen Zoom speakers is on the laptop’s small screen. I use the laptop screen for everything from writing emails to fixing images in Photoshop. There’s a second laptop on the left for odd jobs and backup.

Too clever for their own intelligence

The Wall Street Journal wrote a fascinating piece “

Behind the Mysterious Demise of a $1.7 Billion Mutual Fund.”
An analysis of Infinity Q Diversified Alpha Fund’s disclosures reveals misvaluations and anomalies in a large derivatives portfolio

This stuff smacks of desperation, greed and ignorance. It’s amazing that this still goes in 2021. Here are a few choice paragraphs. I will admit to not having the vaguest idea what they’re talking about:

Infinity took positions in stocks, currencies and other assets across markets, but analysts trying to figure out what went wrong have focused on its use of complex Wall Street products, including those known as variance swaps. They enable investors to bet that price moves in indexes like the S&P 500 will exceed or fall short of a fixed amount over a stated period. Swaps can be tailored by the users, such as investors and the banks they trade with, to make a pure bet on a specific outcome.

The nature of swaps and Infinity’s disclosures with the SEC make it possible to determine how some of the investments were being valued, traders and academics said, and whether those valuations were appropriate. In some cases, they said, it appears they weren’t.

Take the case of a swap that Infinity Q sold tied to the MSCI World Index, according to its disclosures in February 2020. Investors often sell swaps as a way of betting that volatility will decline.

Traders and analysts evaluated the size of the position—which stood to gain about $600,000 for a small drop in volatility—and what’s known as the strike, or the level of volatility the bet is tied to. In this case, that number was 17.3%, Infinity’s disclosures show.

On Feb. 29, 2020, Infinity’s filing showed a gain on the position of $5.6 million.

But given the stated terms, the most Infinity could expect to make on the trade would be $5.2 million, according to Peter Carr, a former Morgan Stanley managing director and chair of the Finance and Risk Engineering Department at the New York University Tandon School of Engineering. That would be the gain if volatility fell to zero.

Such a drop would be rare—volatility hasn’t fallen to zero in the S&P 500 since its inception in 1957.

“There is no justification for that gain,” said Mr. Carr, who has helped write formulas to value variance swaps and followed them for more than two decades. He reviewed the position and said the gain was mathematically impossible.

A few months later, in May 2020, Infinity Q disclosed holding two nearly identical swaps tied to the Russell 2000 index. As the buyer, Infinity Q was betting that volatility in the Russell index would exceed 22.4% in one case and 22.8% in another, over the identical term of 12 months.

The swap that had the lower hurdle of 22.4% was somewhat more aggressive, putting about $250,000 at risk for a small change in volatility, compared with roughly $150,000 at risk for the swap with the higher hurdle. Infinity’s gains stood to rise exponentially as volatility jumped above those thresholds.

Yet the gains the fund booked on the first trade were more than three times as large as on the second, a divergence that academics said was too big to be accounted for by position size or other stated variables. One showed a roughly $13 million gain and the other a $4.1 million gain.

“Both of those gains can’t be right,” said Mr. Carr. He said at least one of the inputs used was wrong—Infinity should have used the same input for expected volatility in the Russell for both swaps. That means the valuation on at least one of the swaps was incorrect, he said.

Mr. Hecker said “both of the examples that were provided to us involve clerical errors that have been previously identified, remedied and reported.”

There are other oddities in the firm’s disclosures. Paul Staneski, founder of consulting firm Derivatives Solutions, says the firm’s variance swap portfolio appeared overvalued by tens of millions of dollars as of May 2020.

The prices the fund used “were unusually favorable and not consistent with where the market was,” Mr. Staneski said. “They’re so far off, they’re not in the ballpark with [volatility] that anybody is reporting.”

You can read the entire bewildering WSJ article here.

Wonderful New Yorker cartoons

Off to see two grandchildren today

They’ve grown. I’ve aged. It’s been a year, or so. They may not recognize the crabby old man who’s their grandfather and who desperately needs a haircut.

Harry Newton