YouSaid · the spoken record

Eric Sorensen

lines on the record: 73
first: 2019-07-23
most recent: 2019-07-23
sittings or episodes: 1
sources: podcast

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“Discard it if, in fact, another asset allocation scheme, like fully, heavily oriented toward equities in a bull market looks better, quote unquote. On the other side, on the equity side, you have to use better data. See, I did the first, I believe, the first quantitative equity ranking system that was put in production on behalf of pension clients for S&P 500. We did it from Solomon Brothers, and it was the same stuff I'd been doing for the prior 10 years as an academic except applied equities. And every stock had a valuation. And evaluation was based upon projected growth and normalized earnings, but a factor model, which would adjust the way you actually, if you will, give a uptick or downtick to the multiple. But I put it in the discounting mechanism, like a long-term DDM. But the factor model was then adjustments to the discount rate based on risk and volatility and stuff like that. And the reason it worked really well, because every stock, it was slow moving. So a stock that had a great value wouldn't change overnight. And the quintiles.”
2019-07-23 · Invest Like the Best · Eric Sorensen - How Quant Evolves - [Invest Like the Best, EP.139] · IDENTIFIED FROM THE TRANSCRIPT · source
“The categories of these elements, the drivers, I think are good. They're broad. There are sentiment is one, inequities, valuation, quality. You can call it ESG. The metrics you use radically changed. I'll come back to that a little bit. The other part is portfolio construction. There's lots of strategies, macro rich, premium, risk parity strategy really is heavily dependent on how you construct, how you weight risk weight. That's a pretty good proposition. My colleague Eddie Chan will tell you every major asset class has the same sharp ratio over any 20-year period. But during subperiods, some of them really have great sharp ratios and others are down. But if you know that and your risk weight commodities, equities, global markets, yield curves, bond markets in various countries, it really has a nice distribution. It doesn't have the fat tail on the left side. So that's a construction. I think that's fairly fundamental, but you have to stick with it. They can't just sort of...”
2019-07-23 · Invest Like the Best · Eric Sorensen - How Quant Evolves - [Invest Like the Best, EP.139] · IDENTIFIED FROM THE TRANSCRIPT · source
“Well, the value proposition, I think, is a real one in a long-term sense. I do believe that things become mispriced. And if it's a viable investment vehicle, like say the stock market or the bond market or subsets of that, there is mean reversion. So if I were 30 or 40 years ago starting a money management firm, I'd be a value investor equity, and I'd make my clients allow me to keep their money for five years. And I would always have higher wealth. There's a thing called stochastic dominance. Can you accumulate more wealth for your client over a five-year period? The trouble with the signals sometimes that are short-lived, I mean, there are periods of time when they're not working. We've been in that in the last couple years, inequities, in quan equity. And maybe it's crowding. It may be other considerations, other influences. You mentioned things that ultimately fail and don't work, and that does happen too, but I think you have to have a philosophy that this strategy will work over time. And you can tweak it.”
2019-07-23 · Invest Like the Best · Eric Sorensen - How Quant Evolves - [Invest Like the Best, EP.139] · IDENTIFIED FROM THE TRANSCRIPT · source
“At some point in time, I thought a very bright guy. And he was doing this for pension plans, or his firm was, by selling out of the money puts in the S&P, which were reasonably inexpensive. I don't know what the structure of implied volatility pricing was. Maybe it was flat. Maybe they were even cheaper than an Athabunny put, probably. Ever since that day, there's been a skew in that pricing structure. The automobile puts have never been cheap again because people realized that was probably the best way to preserve wealth because it's contractual. It was an insurance premium. That premium went out after that. Anyway, I saw that and then other episodes of emerging market, debt crises and long-term capital, and even to some extent the 2007, 8, 9, 9, 9, 9 equity thing, there was a lot of money, and you mentioned earlier crowded. So I just think, and those things will probably unfortunately repeat.”
2019-07-23 · Invest Like the Best · Eric Sorensen - How Quant Evolves - [Invest Like the Best, EP.139] · IDENTIFIED FROM THE TRANSCRIPT · source
“There's a label when I was at Putnam a brief period where they had on a product which was like sounded too good to be true. But anyway, the strategy was to use the future sparket in their case to advise pension plans to hedge their equities. S&P. And there were other people doing it actually using options, which was very interesting. But anyway, that strategy became fairly large relative to the, and one day the market was down and these portfolio insurance programs kicked in, the futures gapped down, and with index arbitrage and the cash markets gapped down and so on. And by noon, the market's down 10%. By two in the afternoon, the New York Stock Exchange and others are calling our head trader in equities and Goldman's and Morgan Stanley say, don't back away from the market. And it was down 22%. So there was ultimate capitulation. One of the interesting things there, you could have hedged and downdrafts using options. And one firm in New York did. I believe the name of the firm was BEA, and I met the principal.”
2019-07-23 · Invest Like the Best · Eric Sorensen - How Quant Evolves - [Invest Like the Best, EP.139] · IDENTIFIED FROM THE TRANSCRIPT · source
“Where there's creative idea, it gets copied, money flows in, it gets a little congested or crowded, and ultimately there's convergence on a limited supply of potential assets you can buy or sell. And then the Federal Reserve or the Some external catalyst says, wait, things aren't the way we thought they were, and people begin to sell. And then there's ultimately capitulation because it becomes illiquid. The first one I saw, I observed up close and personal, was Solomon Brothers in 1987 and the day the market was down 22%, which day was in October. It's always October. And it was associated with a very good strategy started by two academics and one business person from the West Coast, Hane Leland, Mark Rubenstein, who I know, both of them and another guy, Emily Larry O'Brien, LOR. And they had this thing called portfolio insurance. Think about our business, you got to have a great name.”
2019-07-23 · Invest Like the Best · Eric Sorensen - How Quant Evolves - [Invest Like the Best, EP.139] · IDENTIFIED FROM THE TRANSCRIPT · source
“That's a great question. Just as I observed the life cycle of strategies in competitive markets with a lot of motivation for people to participate when something's working and then seeing it ultimately not work for a period of time or even just cease to exist. It strikes me that, first of all, you have this set of people or minds that are creative and they like to discover and they think this might really work. And if it's truly creative and it works, that's great. And you're either adding value or you're controlling risk better and so on. But it's a very competitive space. And people begin to copy it. We wrote a book at Panagora about 10 years ago, myself and two colleagues on sort of a follow-on to Granold and Khan. How do you do quantitative management? We have a lot of stuff in there, which we'd formally publish in some pieces and some journals, which really disclose what we're doing with what we consider to be sort of state-of-the-art at that time. Well, you kind of do that, and people find out and copy it. So you have a situation.”
2019-07-23 · Invest Like the Best · Eric Sorensen - How Quant Evolves - [Invest Like the Best, EP.139] · IDENTIFIED FROM THE TRANSCRIPT · source
“So I found out you could marry, and I love creative. I'll come back to what I think the motives are of why we're in this business. I think they're two, why we run a firm, why you run your firm. And the motive there was to get to the intersection where you get to research and discover things. And someone likes it and it's used what's practical. So after time passed, I became department chairman at the University of Arizona Finance, published quite a lot. I took a one-year leave of absence and went and worked for a small firm. And then after that, I never went back. I just, I found Solomon Brothers or they found me in 1986 and they needed to build a quantitative equity group. They had none to speak of, like what they'd already done in a major way with their bond analytic group, not the proprietary stuff, but Marty Leibowitz's stuff on bond portfolio analytics. So I went there and started that business.”
2019-07-23 · Invest Like the Best · Eric Sorensen - How Quant Evolves - [Invest Like the Best, EP.139] · IDENTIFIED FROM THE TRANSCRIPT · source
“I was doing these research projects that was pricing either not just municipal bonds that went to corporate bonds and yield curve modeling as well as things like preferred stock and convertibles with different features. And I got involved with some investment banking people and said, well, what does it cost us if we put a sinking fund feature on a bond? Well, you had to have a model to say what would the bond sell for without. So to me, this was like in my sleep.”
2019-07-23 · Invest Like the Best · Eric Sorensen - How Quant Evolves - [Invest Like the Best, EP.139] · IDENTIFIED FROM THE TRANSCRIPT · source
“If you're buying quote unquote big data, I'd call it smart data. We built a lot of our own. It's expensive. So you have to really make a, if you will, a business judgment. I don't know how you would manage that without a belief. So I go back to the question, it's just a different belief.”
2019-07-23 · Invest Like the Best · Eric Sorensen - How Quant Evolves - [Invest Like the Best, EP.139] · IDENTIFIED FROM THE TRANSCRIPT · source
“Probably a trade off. Perhaps both work, I would think the one that doesn't have an understanding inside it or a, if you will, use the machine learning terminology isn't supervised, it's unsupervised, just finding correlation structures embedded and then repeating, repeating, repeating with algorithms. And there the objective is to minimize the error. What if it isn't working? And it is trained on historical data. You really need a quandary as to why. Secondly, what do you grab? What data do you go for? How do you decide actually what to look at? So we have our equity team and our multi-asset teams are all, if you will, coexisting. The researchers are also portfolio manager and vice versa. Some are older, some are younger, some have different talents. They watch these markets. They watch these performance results of our strategies. And they're all the time looking for new inputs. But they have to kind of make sense. Otherwise, you could just go after anything. And there's a budget.”
2019-07-23 · Invest Like the Best · Eric Sorensen - How Quant Evolves - [Invest Like the Best, EP.139] · IDENTIFIED FROM THE TRANSCRIPT · source
“And today, even the business we're in at the firm I'm in, Banagora, we have to have intuitive causality when we investigate things. Doesn't mean we don't use fancy tools, but it isn't just price versus whatever we think can correlate with it.”
2019-07-23 · Invest Like the Best · Eric Sorensen - How Quant Evolves - [Invest Like the Best, EP.139] · IDENTIFIED FROM THE TRANSCRIPT · source
“Which one is better for the issuer to minimize the borrowing cost? So I had to develop a model and others had done some of this too, and I was in a group that we did this where the dependent variable was the yield or the price of the bond or something like that. And the independent things were factors, beta factors, multiple regression. Obviously, the credit rating, obviously some other information about the municipality, the slope of the yield curve, the structure of the issue, they're all basically tranches with different maturities priced together. So you build these models. Number one, they had to be things that made sense”
2019-07-23 · Invest Like the Best · Eric Sorensen - How Quant Evolves - [Invest Like the Best, EP.139] · IDENTIFIED FROM THE TRANSCRIPT · source
“My dissertation was on the question of municipalities that issue bonds and the municipal bond market is a fairly large market and there are investment bankers involved almost in every case in distributing those bonds, syndicates. And there's two ways it happens. One is there's a lead underwriter who negotiates with the issuer, whether it be government or a county. And in other cases, the jurisdiction requires competitiveness like you would on any other contract to build a building. So there was a negotiated way of selling these bonds and a competitive bid. So the question would be.”
2019-07-23 · Invest Like the Best · Eric Sorensen - How Quant Evolves - [Invest Like the Best, EP.139] · IDENTIFIED FROM THE TRANSCRIPT · source
“Two other areas of research, and the fourth one I'll mention is where I spent most of my time, call them areas of innovation. One was the whole area of, well, empirical studies, and maybe you can do it. Anomalies. So the academics had to explain it away as this couldn't happen, really, small cap or earnings surprise or whatever. And that behavioral explanations, because people don't think right. They sell at the wrong time by the wrong time. And then there was in my area, I did a lot of research on pricing. So I call it basically econometrics of asset pricing. Just straightforward looking at, hmm, can we get better at actually knowing where a bond ought to trade or a stock audit? So I did a fair amount of research, quite a bit of published academic research for a variety of purposes where I had to use pricing models. And these were based upon multiple regression and the variable in interest would be a price of an asset and then the characteristics that would determine where that price is high or low.”
2019-07-23 · Invest Like the Best · Eric Sorensen - How Quant Evolves - [Invest Like the Best, EP.139] · IDENTIFIED FROM THE TRANSCRIPT · source
“It was like, here's the way of the world ought to look. Then there was another area of literature coming out of Chicago and mainly Gene Pharma and others, which was also descriptive, not asset pricing equilibrium, but asset pricing competition. It's hard to win. Because if information And you can make money. Maybe you ought to try this. And I remember one author way back, and I've used it a lot, said, if there's a lot of competition and there are some costs to entry, the game may be worth winning in terms of if you get the right result, but the game may not be worth playing because of the expected value of the outcome is negative. And that's really interesting. So then there was a body of literature on proving or disproving efficient markets, those two things.”
2019-07-23 · Invest Like the Best · Eric Sorensen - How Quant Evolves - [Invest Like the Best, EP.139] · IDENTIFIED FROM THE TRANSCRIPT · source
“Okay, when I got to the University of Oregon, there was just the beginning of an explosion in financial economics, financial research. Probably the prior 20 years, most of the really good, they were economists, not necessarily a quote-unquote finance professors. There were two or three areas, four areas actually, two in particular, that really began to shape the literature and the way people conducted themselves with respect to doing dissertations and so on. One was the concept that you ought to earn a rate of return in markets that's consistent with the risk you take. And formally, it's the capital asset pricing model. And I like to think of that as asset pricing equilibrium. Jack Trainer, who did not get a Nobel Prize, who I knew well, he's now no longer with us, was a pioneer of that, been Bill Sharp and Jan Massine, and John Littner got Nobel Prizes for that. And basically, that was an area that was new. But it was descriptive.”
2019-07-23 · Invest Like the Best · Eric Sorensen - How Quant Evolves - [Invest Like the Best, EP.139] · IDENTIFIED FROM THE TRANSCRIPT · source
“Mediocre, and very good. Let me talk to that. There is a huge dispersion even after people graduate in what you consider skill and ability. And upon graduation, some are recommended to go to be aircraft commanders or instructors and others had to serve some time as a co-pilot. So there was a, even though they all were above a certain minimum, that's part of it. The other part of it is I don't think there's anything you can point to. It's not athleticism. It's not necessarily intelligence. It might be being able to do well under pressure. There's a series of check flights you have during a program like that. And thereafter, you have them even as a fully rated pilot. You get inspected by the inspector general. You're put in there, no notice, and someone's grading you. And you're going 400 knots and you're doing different maneuvers. You got to be able to do that. But I don't think it relates to any other area of physiological or otherwise. We've got big people, small people, large, we had good athletes, bad athletes. We had smart people. We had kind of average intelligence.”
2019-07-23 · Invest Like the Best · Eric Sorensen - How Quant Evolves - [Invest Like the Best, EP.139] · IDENTIFIED FROM THE TRANSCRIPT · source
“And as an instructor, you have to make a judgment. Is this person, in those days there were just men, now there are women, can he do this? And so in a sense, I learned early on in my career how to discern that and then to take the risk to empower people. Because you get out of the plane, out of the back seat as the instructor and you watch your student go and you keep your fingers crossed. It doesn't crash and burn.”
2019-07-23 · Invest Like the Best · Eric Sorensen - How Quant Evolves - [Invest Like the Best, EP.139] · IDENTIFIED FROM THE TRANSCRIPT · source
“That's a very good question. First of all, these students who I call them students in quotes, they were like one year younger than me. I had been one a year earlier. And then I was an instructor for about five years. They would come in to our flight where I was an instructor pilot and they had just finished training in another jet, which was subsonic and a very different aerodynamic characteristic. So this is a new experience. This thing is going 250 or 300 knots by the time you get the gear up and leaving the, I mean, it's fast. It got afterburners and so on. So the first couple flights, they're a little nervous, but for an instructor and for their program, they have to go solo relatively soon in that aircraft, like after maybe six or seven sorties or missions.”
2019-07-23 · Invest Like the Best · Eric Sorensen - How Quant Evolves - [Invest Like the Best, EP.139] · IDENTIFIED FROM THE TRANSCRIPT · source
“That by itself. So I've often thought about what we do now. It's a combination of intelligence, human intelligence, decision-making, thought process, instinct, emotion, and using whatever the latest tools are to do that. And I really enjoyed that.”
2019-07-23 · Invest Like the Best · Eric Sorensen - How Quant Evolves - [Invest Like the Best, EP.139] · IDENTIFIED FROM THE TRANSCRIPT · source
“Well, thank you. I flew an airplane that used to train advanced training for people that are getting their pilots degree in the United States Air Force, their wings, and to say the third plane that they would have been in. And so last one before they get commissioned as a pilot, it's called an F-5 or T-38. It's a fantastic airplane. Northra built it, still in use. The one we flew carried 4,000 pounds of fuel, and when it didn't have fuel, it weighed 8,000 pounds, just a rocket. No lift, just a rocket. Of course, supersonic and high performance. And the thing about an aircraft that is somewhat similar to the business where you and I are in today, it's a machine with limits, rules, great performance, but you can overextend it. But it's also operated by human. So there's nothing like being in a high performance aircraft and pulling 5Gs with your right hand on the control stick and your left hand on the throttles and being forced down in that seat and just that feeling. And I don't think the machine could do that.”
2019-07-23 · Invest Like the Best · Eric Sorensen - How Quant Evolves - [Invest Like the Best, EP.139] · IDENTIFIED FROM THE TRANSCRIPT · source
“I appreciate that. I was in the Air Force in part because of the environment. There was something called the Vietnam War, and I was an undergrad in college at the University of Oregon, and I joined ROTC, and my father had been a military officer in the Army in the Second World War, and we had kind of a proclivity for serving. So I went to pilot training, and that's a one-year program and became then soon after an instructor pilot in a high-performance jet airplane.”
2019-07-23 · Invest Like the Best · Eric Sorensen - How Quant Evolves - [Invest Like the Best, EP.139] · IDENTIFIED FROM THE TRANSCRIPT · source