The Great Beta Breakdown, Where & Why We Disagree with Beta

Introduction: Sometimes we own equities that go up & down more than the market average
Rhetorical Question: Which group is riskier?
Conclusions: The prevalence of the preposterous
Exhibits

Introduction: Sometimes we own equities that go up & down more than the market average

In our view, one of the great ironies of the post-Madoff era is the emphasis on trying to find managers who generate returns that approximate a 45-degree upward sloping line. Equally impressive has been the rise of rudimentary measures of “risk” in evaluating managers. Discussions about Sharpe ratios have become ubiquitous. We understand the affinity for such measures and are fond of algebraic constructs in helping us understand the Kailash portfolios, but we also believe in common sense. We both understand Mr. Buffett’s comment that “…volatility is almost universally used as a proxy for risk. Though this pedagogic assumption makes for easy teaching, it is dead wrong: volatility is far from synonymous with risk.”¹; however, we also see value in volatility metrics as a tool to help study and reinforce our conviction around fundamentals. Figure 1 below shows that, at times, the Kailash portfolios’ ex-ante betas² vary over time and are currently finding more fundamental opportunities in stocks with betas greater than 1. We believe the market does not always provide opportunity sets that Foote out to a beta of “1” or lower. We believe opportunities and perceptions around risk in equity markets are not static. We also believe that “betas” can be misleading and efforts at “optimization” are often counter to investors’ long-run interests.

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As a reminder for our Financial Advisors: our models are available on a continuous basis, and most have been in production for over a decade. If you are looking for simple, concentrated, low turnover, and tax efficient model portfolios we would like to talk with you. KCR also offers a wide range of easy-to-use but sophisticated tools. Our toolkits can help identify mispriced stocks with the best and worst risk/reward characteristics, estimate a stock’s duration and warn you when a company is engaging in low-quality accounting. Over the last 12 years, KCR has built and offers time-tested and class-leading products built by experienced and proven money managers for fixed to low prices.
Kailash Capital’s sister company, L2 Asset Management, runs market neutral, long/short, large-cap, and mid-cap long-only portfolios with a value and quality bias. L2 employs a highly disciplined investment process characterized by moderate concentration, low turnover, high tax efficiency, and low fees. While nobody can predict the future, we believe the recent resurgence in risk-adjusted returns seen across all products is the beginning of what may be a long period where speculation is punished, and prudence and patience rewarded.

ADDITIONAL READING

The topics discussed in this article are aimed at seasoned professionals, as such, we have included some extra reading for anyone seeking out more information related to the topics above.

Click the following to read more about Speculation Investing, Collapse of Enron, Vanguard Small Cap, Mean Reversion Strategy Intraday

Disclaimer

The information, data, analyses, and opinions presented herein (a) do not constitute investment advice, (b) are provided solely for informational purposes and therefore are not, individually or collectively, an offer to buy or sell a security, (c) are not warranted to be correct, complete or accurate, and (d) are subject to change without notice. Kailash Capital, LLC and its affiliates (collectively, “Kailash Capital”) shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information herein may not be reproduced or retransmitted in any manner without the prior written consent of Kailash Capital. In preparing the information, data, analyses, and opinions presented herein, Kailash Capital has obtained data, statistics, and information from sources it believes to be reliable. Kailash Capital, however, does not perform an audit or seeks independent verification of any of the data, statistics, and information it receives. Kailash Capital and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for tax, legal, or accounting advice. You should consult your tax, legal, and accounting advisors before engaging in any transaction. © 2021 Kailash Capital, LLC – All rights reserved.

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