Wednesday, April 30, 2008

Well, it's time for the annual review of the state of the hotel-hopping Jews. See here and here for previous reviews.

I might have foregone the exercise this year if my good friend Jonathan Rosenblum hadn't posted the following:

I will never forget an address by Rabbi Ephraim Wachsman at an Agudath Israel of America convention on the topic “Living a Life of Ruchnios amidst Gashmius.” I had never before heard Rabbi Wachsman, and I practically jumped out of my seat when he thundered: This topic represents a fundamental mistake. There is no ruchnius amidst gashmius. To the extent that a person is living in the world of gashmius he is removed from ruchnius!

I was reminded of those words recently on a recent trip to Los Angeles, where I had a rare opportunity to speak with a rav whose wisdom has always impressed me. In the course of our conversation, he asked to me, “What would you say is the greatest threat to Yiddishkeit today?” I leaned forward eagerly, confident that he would mention one of my favorite subjects. But I must admit that his answer would not have been on my top ten-list.

“Pesach in hotels,” turned out to be the winning answer. And my friend’s central criticism was similar to that of Rabbi Wachsman: the Pesach hotel industry takes what should be one of the ultimate spiritual experiences of every Jew’s life and encases it in a thick wrapper of materialism. Read the advertisements, he told me: “No gebrochts” right next to “24 hour tea bar;” “Daily daf hayomi” next to “Karate, go-carts, and jeeping for the kids.”

“Olympic-size pool,” “state-of-the-art-gym” (to work off all the extra pounds from the non-stop eating), “five-star accommodations” and famous singers are de rigueur for the full Pesach experience. And many throw in exotic locations – Hawaii, Cancun, the Bahamas, and an eighteen-hole golf course. What exercised my friend the most was the way that well-known rabbis, and even roshei yeshiva, are impressed into service in the advertisements, as if to put an imprimatur of ruchnius on the festivities.

My friend was raised in a particularly biting style of mussar, and he was just warming to his subject. He described the wailing when the dessert table runs out and the rush forward when the hapless waiter comes with refills and is almost trampled underfoot. Hotels have to put security guards around the 24-hour-tea rooms, lest some poor soul from the hotel down the road, where the dining room closes at 10:00 p.m., cannot make it to breakfast without a late snack.

This year's Pesach visit to the Dead Sea was no vacation. It was a research expedition in the name of science. What could we learn from the natives about myth and kinship? Have they maintained the rituals described above or would there be signs of acculturation? Without experiential immersion as a participant-observer, there would be no way for me to know. On chol hamoed, I headed off with my kin to the hotel I'll call Tristes Tropiques.

First some theoretical issues. No Ruchnius amidst gashmius. There were no disembodied souls in evidence down at Tristes Tropiques, nor have I ever encountered any previously (except maybe in Bat Ayin). So the venerable Ephraim Wachsman (EW) must have had something else in mind. Maybe he simply meant that people who just eat and loaf get fat and lazy. But that near-tautology hardly seems thunder-worthy. And neither I nor EW need to visit a five-star hotel to confirm its truth; there's plenty of evidence for it in any one of Monsey's many kollelim. So, while I don't doubt that EW's sound and fury signifies something, I leave a full deconstruction to future researchers.

As for my empirical research, it seems the Jews are in decline. At TT, there was no 24-hour tea bar, no karate, no go-carts, no jeeping, the pool was not Olympic size, the gym wasn't state-of-the-art, the waiters might have been hapless but none were trampled, no 18-hole golf course. Bekitzur, lo ishim velo asham, lo badim velo blulos.

So it might be that the nameless Californian rabbi (NCR) was misled about the facts and Mahmoud Ahmadinejad and Lipa Margolies remain bigger threats to the Jewish People than my travel agent. But even if NCR's hypothesis was not quite right, there was no shortage of data there in search of a unifying theory. The crowd was, for want of a better word, mixed. There were women there who covered every hair on their head and there were women who cavorted in bikinis. (Best of all, there was at least one woman there who covered every hair on her head AND cavorted in a bikini. I thought she carried it off quite well.)

Some of these people would force there way onto the elevator without waiting for people to exit. Some smoked in the lobby where smoking was both forbidden and annoying. Some stuck their plates in the food servers face while he was trying to serve the person in front of them. Some kept half a dozen people waiting while they filled a huge netillas yadayim cup from a slow faucet to the tippy top. I could go on but I don't want to bore you. You know these people.

The anthropologist in me thinks the observed data points to a correlation between a tendency to the above modes of behavior and a tendency to certain forms of conspicuous piety. But the Jew in me is resistant to hackneyed stereotypes. So let's just tentatively conclude as follows. No ruchniyus amidst gashmiyus? Doubtful. No manners amidst frumkeit? Could be.

Sunday, April 13, 2008

A hedge fund will invest your money for you – if you’ve got enough of it – in exchange for 20% of the profit. So you might wonder, how can they possibly earn a large enough return to make it worth your while to let them lop off that 20%? I’m going to tell you.

(First, a disclaimer. I’m not making any claims about any specific hedge funds that I might once have been or currently am affiliated with in some manner. This is about hedge funds in general.)

Well, maybe first I should explain why you should be skeptical of the very possibility of beating the market. There is a great deal of evidence for what is known as the Efficient Market Hypothesis (EMH). There are multiple version of EMH but to keep matters simple, let’s put it this way: stock prices move for two reasons and you can’t exploit either one of them. If there is news that would justify a price adjustment, the adjustment is instantaneous and discontinuous, so you can’t exploit it. Otherwise, price fluctuations are just random and hence unexploitable by definition.

If EMH were to constitute a perfectly accurate characterization of the market, the situation would indeed be quite hopeless. But there actually is a small amount of wiggle room. First of all, information does not spread instantly and isn’t acted on instantly or uniformly. Second, other fluctuations are not completely random; they are a function of the interdependent actions of multiple agents, at least some of which are at least partially predictable. Third, in the specific case of hedge funds, there is an asymmetry in the compensation structure that allows them to make a great deal of money at the expense of their investors.

Let’s consider each of these three loopholes and how they can be exploited.

Exploiting information. Well, you can make money the old-fashioned way by earning it. Investigate companies in depth, determine their true value, and invest in those the market has undervalued. This isn’t guaranteed to work since the price of a stock doesn’t always converge to its value (however you want to measure value). But Warren Buffett has made a bundle this way for many years.

Most aggressive young hedge fund mangers would regard the old-fashioned approach as rather tedious. There’s a faster way to make a buck from information. While it is illegal to trade on insider information, there is a very fine line between insider and public information that becomes blurred at those sensitive moments when information is just about to undergo a phase transition from insider to public. Investment houses have many departments serving multiple needs: they act as brokers for the sale and purchase of equities, they offer investment analysis and advice, they underwrite public offerings, they broker mergers and acquisitions, etc. Of course, this leaves room for plenty of mischief, the most notorious example being analysts pushing certain stocks in order to curry favor with companies that generate business for other departments. A less well-known breach of the so-called “Chinese Wall” between departments is the one through which brokers obtain information that is about to become public so that they can pass it on to their favored clients. One of the tricks hedge funds use in order to “get the first phone call” is to “churn”, that is, to make lots of meaningless trades in order to generate huge fees for the brokers. These fees are essentially legalized bribery.

Crystal balls. Stock prices are driven by imbalances between how badly and in what quantities people want to buy shares of a stock at a given moment and how badly and in what quantities people want to sell shares of that stock at that moment. People often act predictably; we are programmed by evolution to freeze up under certain circumstances and to act rashly under others. Transactions generated by computer models are predictable in other ways: they must be responsive to the demands of creditors, clients and SEC regulations. If you can figure out how to exploit this, you can make money. The way you do this is not by directly applying psychological theories or reverse engineering programs but simply by mining price movements for regularities that might indirectly result from indeterminate herd behavior or program trading. Such regularities can be found, but they will not be simple.

Many amateurs don’t appreciate the futility of overly simplistic strategies. They inevitably come up with one of two simplistic strategies. The first is trend-following: if a stock’s prices are going up, buy some on the assumption that it will continue going up. (Indeed, this will happen if some gorilla needs to buy a lot of the stock and is parceling out its buy orders.) The second is reversion to the mean: if a stock’s prices are going up, sell some on the assumption that it will soon revert to its “natural” price. (Indeed, this will happen if the gorilla needed to buy some of the stock and has gotten what it wanted.) If you can somehow divine whether the gorilla is starting or finishing, you can make money. Statistical arbitrage (“stat arb”) guys made a ton of money on reversion for a while and some day-traders still make money following trends on a few individual stocks. But the stat arb party ended in 2002 when too many people got in on it and trend-following doesn’t scale up well to the kind of money hedge funds need to put to work.

Of course, both reversion and trend-following strategies come in many flavors. For example, if somebody introduces you to a “Russian genius who has cracked the market”, you can be pretty sure that the strategy is to assume that a stock that has moved x standard deviations from its y-day moving average will revert towards that average (x and y are the secret numbers). The problem usually is that the trigger to buy or sell tends to fire infrequently and therefore the only way to make money on such a strategy is too invest a ton every time the trigger fires. But then you end up with two liabilities: first, you could seriously impact the price (if you want to buy a lot of the stock, you’ll pay extra to get it and when you want to sell it, you’ll have to settle for less to unload it) and second, you risk too much of your stake on too few positions. Amateurs underestimate the significance of both these liabilities because they assume that markets are perfectly liquid and that prices move continuously. They’re not and they don’t and if you don’t take that into account, you either won’t often get into the positions you want or you’re going to eventually get killed on a position you can’t get out of.

But like I said, if you know how to mine the data for subtle regularities without cheating and you know how to manage risk and market impact, you can make good money even with a very cloudy crystal ball.

Selling earthquake insurance. Finally, we get to the main point. Sophisticated investors don’t just buy and sell stocks and commodities. They trade a dizzying array of ever-more-complicated “derivatives”. All of these derivatives amount to the same thing, best explained by analogy. When you buy a car, you pay separately for the car and for insurance on the car. You pay, say, $25,000 for the car because that’s what it’s worth (taking into account its utility, resale value, risk of ownership, etc.) and another, say, $1,000 because you don’t want to assume the risk of losing everything in the event the car is stolen or totaled. Stockowners, like car owners, are often willing to pay a premium to be insured against being left holding the bag if some catastrophe sends the stock price plummeting. Derivatives are devices for separating out value from risk; in short, they are complicated insurance policies.

So, if you were a hedge fund, would you be buying insurance or selling it? You’re probably thinking that hedge funds would be eager to minimize risk by buying insurance. But, no. Buying insurance can be a useful supplement to a crystal ball (see above) if you happen to have one, which most people don’t, but it’s not much of a stand-alone strategy. In the short run, you mostly lose money, and in the long run, your investors have vanished.

But selling insurance, now that’s a good business for a hedge fund. Here’s why. For simplicity, let’s assume earthquake insurance is fairly priced. Then, if you’re investing your own money, in the long run, whether you buy or sell earthquake insurance, your expected profit or loss is zero (by definition of "fairly priced"). Most of the time the insurance seller makes money and every once in a (possibly, very long) while there is an earthquake that transfers the money back from the insurance seller to the insurance buyer. But hedge funds don’t invest their own money; they (usually) invest somebody else’s money. The key point is that they take 20% of the profits when there is a profit but they don’t give back money when they incur a loss. Now, there is a really great chance that ten years will go by without an earthquake, so that hedge funds selling earthquake insurance will make very consistent profits. Solid investors will happily give their money to someone with steady profits in shifting markets, the funds will grow quickly and the managers will get very rich.

Of course, one day there will be an earthquake and the investors will be wiped out. But the fund managers will still be rich because they don’t incur 20% of the losses. (They will have to make back the losses before they can cash in on subsequent profits, which is a bummer. That’s why they will close the underwater fund and start a new fund.)

Wednesday, April 09, 2008

Tonight will be the third consecutive night that I'm attending a wedding and -- get this-- it will be the first of the three that is not taking place in the Ma'arat HaMachpela. What are the odds of that?

The two weddings in (actually, next to) the Ma'arah were both very special. If nothing else, they were showcases for the amazing diversity that has taken hold in our tiny little corner of a tiny little corner of the world. Last night's wedding brought together the daughter of American olim from My Little Town and the son of a couple at the epicenter of the artsy, neo-hassidish, Hevron world. You wouldn't have had a hard time guessing which side any given older guest had been invited by, but if you'd have tried to perform that trick on the young people, forget about it.

The wedding the night before that was a very special story. As a teenager, Y supported himself as a janitor in a shul in his native Venezuela. Although he was not Jewish, he grew very connected to Judaism. He heard about a conversion institute for Spanish-speakers in My Little Town and simply moved here.

Y was sort of adopted by the people on my street and by one family in particular. When he successfully completed the conversion course and was called up to the Torah for the first time, our shul made him a kiddush. On Shabbat, he would stay on our street, usually sleeping in our extra room.

Y attended Machon Lev, studying Torah half a day and computers half a day. Having no financial assistance, he spent every free minute cleaning and painting houses. He eventually learned to speak Hebrew better than I do. In addition to all that, Y volunteered at Shaarei Tzedek.

And it was there that he met O, a nursing student from a frum French-Moroccan family, who had come to Israel on her own. On Monday night, a son of Avrohom Avinu married an FFB olah from Marseilles on the spot revered as the eternal resting place of his adopted father. The Jewish gene pool will be all the better for it.

Tuesday, April 01, 2008

I think one of the reasons that anti-Semitism is so hard to explain is that there are really two varieties of it that are mistakenly conflated. Once we tease them apart, the phenomenon is more easily understood.

In a certain sense, Jews are a fairly predictable lot. They arrive in some new land with nothing, within a few generations they become conspicuously successful, they are kicked out and they loop back to the beginning of this sentence. Their success pisses off two kinds of people. Most countries are highly stratified both socially and economically. That is, there are well-defined classes and families are typically locked into one of them for many generations.

Both the haves and the have-nots have strong incentive to believe that one is tied to one's class by some cosmic decree. The privileged don't want to feel guilty about their incredible stroke of luck; it's much more comfortable to believe that one's good fortune signifies inherent superiority. The unsuccessful wish to console themselves that their failure to pull themselves up signifies no failing of their own; they'd rather believe that their lack of success is pre-ordained and immune to effort and ability.

The Jews' success in social climbing puts the lie to both fantasies. Earned success is an implicit rebuke to inherited privilege. It is an even more blatant rebuke to inherited despair. Note that the most philo-Semitic countries -- most prominently, the United States -- are those that have the greatest social mobility. And the pockets of anti-Semitism in the U.S. are mainly among patricians like Pat Buchanan and the most hopelessly backward minorities.

Israel seems to be recapitulating in the global economy what Jews have traditionally done in national economies. And sure enough, anti-Semitism on the national level is greatest among the Pat Buchanan countries -- ex-empires gone to seed, whose claims to entitlement on the world scene are rooted more in a history of privilege than any demonstrable virtue -- and the loser countries -- whose sorry excuses for terminal uselessness don't quite match up with Auschwitz.