So, what do you do when you’ve made a billion dollars trading other people’s money and the regulators have barred you from trading other people’s money? Here’s an idea: Start trading other people’s ideas.

Quantitative investing is the process of choosing potential investments based purely on statistical measurements

True enough, the infamous Steven A. Cohen, he of the now-defunct SAC Capital Advisors, is ponying up $250 million to mechanical engineers, nuclear scientists, and other non-investment smartguys that come up with market-beating mathematical models. Cohen’s quarter-billion will be funneled through an outfit called Quantopian, a too-cleverly-named hedge fund that promises to disperse the money to these do-it-yourself traders.

Quantitative investing relies on math-based models to bet on statistical relationships or patterns in stocks, bonds, options, futures, or currencies

 Already, about 85,000 quant-wannabes from 180 countries have signed up on the company’s free web-based platform, collectively creating more than 400,000 algorithms. Quantopian’s employees will use an algorithm of their own to spot the more successful programs. So far, Cohen and friends have selected 10 “candidates” to trade a few hundred thousand dollars. The chosen few, of course, will be obliged to share any profits with the fund’s creators.

Quantitative traders essentially apply the same process to the financial markets that meteorologists use to predict weather

By way of reminder, Cohen and SAC Capital were shut down in 2013 after pleading guilty to criminal insider-trading charges. The irony shouldn’t be lost that Quantopian’s model is being portrayed as an “interesting” new way to get talent into the investment industry. And no one should be surprised that several other companies are also developing systems that allow amateur quants to submit their trading ideas. Truth is, algorithms work until they don’t. Exploitation, on the other hand, apparently works forever.

What the markets have been doing…

Amid a steady stream of second-quarter earnings reports, broad market indexes like the Dow and S&P moved sideways to modestly lower across the period. Smaller-cap indexes, on the other hand, not least of which the NASDAQ Composite, tore it up. The S&P MidCap 400, the market’s best performing benchmark year to date, moved further into record territory, while the tech-heavy NASDAQ, enjoyed the period’s biggest weekly gains.

According to analytics and data firm FactSet, 2Q earnings for the S&P 500 as a whole are down 3.8% versus a year ago. The poor but better-than-anticipated results have actually helped stock prices in recent weeks. Macroeconomic factors, meanwhile, appeared to have little impact. The Commerce Department reported at the end of the period that the economy had expanded at an annualized rate of 1.2% in the second quarter, which was slower than expected.

Index Friday’s Close Two-Week Point Change Year-to-Date Change
DJIA 18432.24 -(84.31) + 5.78%
S&P 500 2173.60 +11.86 +6.34%
NASDAQ 5162.13 +132.54 +3.09%

Treasury yields moved little, even with falling oil prices and some economic releases encouraging investors to seek out safer assets. A lackluster tone dominated the investment-grade space as well despite strong demand. High yield market sentiment was mostly firmer, thanks to the better-than-anticipated earnings reports and no large deals on the calendar. Tax-frees continued to see good demand, with new deals substantially oversubscribed.

Fixed Income Yield Two-Week Yield Change
2-Year Treasury
10-Year Treasury 1.52% -(0.06)%
30-Year Treasury 2.27% -(0.03)%
Bloomberg Corporate Bond Index 2.76% -(0.09)%
30-Year Municipal Bonds 2.19% NC

The government can’t really surprise to the downside…

Unfunded pension liabilities: The number one issue ahead of municipal officials across the U.S.

Quote of the Week…

“The artist Christopher Wool has a word painting, ‘Sell the house, sell the car, sell the kids.’ That’s exactly how I feel – sell everything. Nothing here looks good.”

            Jeffrey Gundlach, chief executive of DoubleLine Capital

Number of the Week…

$6.2 billion

Facebook’s advertising sales in the latest quarter, of which 84% came from advertising on mobile devices.

What Fund Architects has been doing…

We made a couple of moves in the Fund Architect Portfolios to start the month August. On the equity side, we swapped out of our position in global utilities and moved the assets to the iShares Global Healthcare ETF (IXJ). The utilities position was working well for us, but healthcare emerged as a more attractive opportunity. And since we have a good-sized allocation to Treasuries, healthcare reduces our interest rate exposure a bit. The Portfolios will start the month positioned in U.S. Large Cap Equity, Treasuries, and Global Healthcare.

On the fixed income side, we took a little profit out of our positions in preferred stock and emerging market sovereign debt and traded back to the high-yield corporates and convertibles we held in June.

We also traded out of our 2017 BulletShare ETF, having essentially wrung out all the returns we could from the position. On the buy side, we reallocated the seven percent weighting to an energy infrastructure MLP we’ve been watching for a while. While the MLP shouldn’t move as much as oil since it’s basically tied to transportation and pipeline, the stock’s still down dramatically – almost 50% from its high. As a result, the position will yield us nearly 12% in dividends (based on price as of date of purchase). Dividends, by the way, we’re comfortable are secure.

Overall, we’re pleased with the performance of the Portfolios in this frustrating market. While our global sector offerings may have lost a little ground relative to U.S.-only offerings, the strategy still added good value across the period. And the ride, as they say, was a heckuva’ lot smoother than most.

The views in this commentary are those of Fund Architects. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this commentary, will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. Moreover, you should not assume that any discussion or information provided here serves as the receipt of, or as a substitute for, personalized investment advice from Fund Architects or any other investment professional.  The information contained within this commentary should not be the sole determining factor for making investment decisions. To the extent that you have any questions regarding the applicability of any specific issue discussed to your individual situation, you are encouraged to consult with Fund Architects. Information pertaining to Fund Architects advisory operations, services, and fees is set forth in Fund Architect current disclosure statement, a copy of which is available upon request. Fund Architects, LLC is an SEC Registered Investment Advisory Firm.