BijaAdvisors

Better Decisions, Better Results

Seeds of Thought
Cognitive Science Meets Investment Management

Issue 13-10
May 13, 2013

Uncorrelated Correlation
Among the many examples of cognitive dissonance currently wreaking havoc on the hedge fund
community is the desire to maintain a low correlation to the equity markets while simultaneously
generating positive results in the midst of a four year bull run in equities. It can't be done. Now this may
be like Christopher Columbus crediting himself with discovering an inhabited land mass, but I propose
we create a new analytical tool for the investment community. For simplicity's sake, let's call it the Bija
Correlation Ratio, which does for correlation, what Sortino did for the Sharpe Ratio.
Since the start of my portfolio management track record in August 2002, my correlation to the S&P 500
has been 19.7%, while the HFRX GlobalMacro Indexs correlation has been 16.5%. Although it would
appear that someone who is looking for diversification from equities would prefer the index, however
slight that advantage might be, I would argue otherwise. You see, over the same period the Index has had
a positive correlation during down months in the S&P and a negative correlation during the up months.
My portfolio, on the other hand, has a positive correlation (17.2%) during the up months and a negative
correlation (-30.0%) during the down months in the S&P. Wouldnt that be a more valuable measure to
consider when seeking true alpha and total returns?

Take My Partner, Please

"'I am' is reportedly the shortest sentence in the English language. Could it be that 'I do' is the longest
sentence? - George Carlin
It's often said that a business partnership is like a marriage and the data is supportive of that assertion.
The average lifespan for a business is 8.5 years, which is precisely how far along in a marriage when the
average divorce occurs. I come from a long line of entrepreneurs, have experience with partnerships and
have been with my (first) wife for 24 years, so I have some experience in this area. Some say opposites
attract, and it may be true, but it hardly makes for a lasting bond. What makes for a lasting relationship
are a common set of principles, for that is what pervades all actions and expectations, in good times and
bad. Likes, dislikes, interests and so many other extraneous factors are far less consequential than what
might be implied by the weights typically applied to them. Just as wanting kids or hoping to be healthy
and wealthy isn't enough to ensure a successful marriage, neither can a business depend solely on a
common desire to "be the best" or "be world class," for in all of these cases, the goals are relative and,
therefore, dependent upon the assessor's core principles.
In a business, it is the set of principles which the partners hold in common that forms its culture. In
bringing together the Bija founding partners, I sought out individuals who share my core principles,
thereby purposefully crafting a culture which values and encourages transparency, discipline, creativity,
introspection, individuality, equanimity, compassion, balance and accountability, no matter the task at
hand or the challenge being faced. It's not enough for these to be my principles, though. In his book,
!
Copyright 2013 by Bija Advisors LLC.; BijaAdvisorsLLC.com
Reproduction or retransmission in any form, without written permission, is a violation of Federal Statute
Important disclosures appear at the back of this document

Bija Advisors Seeds of Thought

Issue No. 13-10

Sacred Hoops (quoted repeatedly in this edition of Seeds), Phil Jackson, one of the most successful
coaches of all time and someone I deeply admire, said it perfectly. "Visions are never the property of one
man or one woman. Before a vision can become a reality, it must be owned by every single member of
the group." It is this common vision, these principles, shared by my partners, Chuck Mounts and Will
Wallin, which forms the Bija culture and pervades the relationships we forge with all who join us as
investors, service providers and co-workers.

The Invisible Leader

"The most important part of the job takes place on the practice floor, not during the game. After a certain
point you have to trust the players to translate into action what they've learned in practice. Using a
comprehensive system of basketball makes it easier for me to detach myself. Once the players have
mastered the system, a powerful group intelligence emerges that is greater than the coach's ideas or
those of any individual on the team. When a team reaches that state, the coach can step back and let the
game itself 'motivate' the players. You don't have to give them any 'win one for the Gipper' pep talks,
you just have to turn them loose and let them immerse themselves in the action." - from Phil Jackson's
Sacred Hoops: Spiritual Lessons of a Hardwood Warrior.
I have a distinct management style, which Sunstein and Thaler coined, Libertarian Paternalism, in their
book, Nudge. The libertarian aspect "makes it easy for people to go their own way; to not burden those
who want to exercise their freedom." Combine this with paternalistic policies which "try to influence
choices in a way that will make choosers better off, as judged by themselves," and you create an
environment which is a breeding ground for intelligent, independent decision making.
The Trade Write-Up is one of the tools I specifically devised to nudge portfolio managers away from
impulsive trading; to be more deliberate in their investment process and disciplined in their execution.
By sharing the Trade Write-Ups across the firm, as well as with investors, and encouraging feedback, the
PM's ego becomes a force for good. It's based on a Taoist principle of yielding to an opponent's force, in
this case our own ego, in order to render it powerless. By developing and implementing processes,
structures and well-communicated policies designed to nudge the entire team, myself included, in the
right direction, I become what Phil Jackson calls an "invisible leader."

Slower is Faster
Every once in a while, someone will question whether my investment process isn't too confining. There
is no doubt that limiting us to trades that have a self-liquidating feature (ie defined downside), requiring
that we adhere to predefined take profits (or sooner), having to take the time to pre-script trades, and
sticking strictly to only the most liquid markets and instruments, curtails our opportunity set. Question is
whether it is too restrictive. In my experience, the opportunity set that remains when these restrictions
are in place is somewhat positively skewed. That means, all else being equal, including the PM's skills
and the market environment, the odds of putting on a winning trade are slightly better than that of a
losing trade. Conversely, the odds, when selecting from within the restricted zone, are negatively
skewed.
Try this analogy, from Mark Buchanan's The Social Atom. "A crowd rushing to the exit piles up in a
traffic jam, whereas people avoid the jam and get out if they move more slowly. As Helbing puts it,
'Slower is faster.' But now for a bigger surprise. A room might obviously have some tables in it. How
would their placement and size affect the escape of a crowd? It seems obvious that obstacles have to
make the situation even worse. Yet, counterintuitively, they can be quite beneficial. In particular, a table
Copyright 2013 by Bija Advisors LLC.; BijaAdvisorsLLC.com
Reproduction or retransmission in any form, without written permission, is a violation of Federal Statute
Important disclosures appear at the back of this document

Bija Advisors Seeds of Thought

Issue No. 13-10

placed a few feet in front of the exit can help regulate the human flow. The table changes the pattern of
self-organization, helping everyone get out more quickly."
The self-imposed restrictions embedded in our investment process are very similar in nature to the tables
strategically placed in front of the exits in Buchanan's experiment. For those who are impulsively
inclined, obstacles of any kind can feel confining, even dangerous at times. Once again, Phil Jackson
offers some relevant words of wisdom. "Inevitably, paradoxically, the acceptance of boundaries and
limits is the gateway to freedom."

Is That Your Capacity or Are You Just Happy to See Me?

"It's a small world, but I wouldn't want to have to paint it." -- Steven Wright
Considering the fact that we invest via global macro instruments, it's interesting how often we're queried
about capacity constraints for our strategy. For instance, in foreign exchange, the world's largest market,
we have thirty of the world's largest financial institutions who are ready, willing, able and eager to
provide two-way prices on every instrument and pair in our approved toolset. As for the massive
sovereign fixed income markets, so long as the voracious appetite of our neighbors just down the
California coast can be sated, I'd say we have plenty of room to grow. Add exchange traded commodity
and equity index options to the arsenal and you have a strategy that could easily accommodate more
investable assets than the great majority of hedge funds in existence today.

About the Author

For more than two decades, Stephen Duneier has studied cognitive science, applying what we know
about how the brain works, how we deal with uncertainty and solve problems to develop a whole new
approach to business, investing, and life itself. The result has been top tier returns with near zero
correlation to any major index, the development of a billion dollar hedge fund, a burgeoning career as an
artist and a rapidly shrinking bucket list.
Duneier now teaches Decision Analysis at the University of California Santa Barbaras College of
Engineering while delivering his distinctive brand of actionable intelligence to top decision makers
across numerous industries via Bija Advisors publications.
As a speaker, Stephen has developed a series of informative and inspirational talks on topics ranging
from how global macro analysis can help us understand the world around us, how cognitive science can
improve performance, and the keys to living a more deliberate life. Through the years, he has earned a
reputation for delivering his unique insight via beautifully woven, highly entertaining stories that
inevitably lead to further conversation, and ultimately, better results.
Stephen Duneier was formerly Global Head of Currency Option Trading at Bank of America and
Managing Director of Emerging Markets at AIG International. His artwork is represented by the world
renowned gallery, Sullivan Goss. He received his master's degree in finance and economics from New
York University's Stern School of Business.

Bija Advisors LLC

Web: BijaAdvisorsLLC.com
Email: info@bijaadvisorsllc.com
Twitter: @BijaSeeds
Phone: 805 452 9429

Copyright 2013 by Bija Advisors LLC.; BijaAdvisorsLLC.com

Reproduction or retransmission in any form, without written permission, is a violation of Federal Statute
Important disclosures appear at the back of this document

Bija Advisors Seeds of Thought

Issue No. 13-10

In publishing research, Bija Advisors LLC is not soliciting any action based upon it. Bija Advisors LLCs publications contain material based upon publicly
available information, obtained from sources that we consider reliable. However, Bija Advisors LLC does not represent that it is accurate and it should not be
relied on as such. Opinions expressed are current opinions as of the date appearing on Bija Advisors LLCs publications only. All forecasts and statements
about the future, even if presented as fact, should be treated as judgments, and neither Bija Advisors LLC nor its partners can be held responsible for any
failure of those judgments to prove accurate. It should be assumed that, from time to time, Bija Advisors LLC and its partners will hold investments in
securities and other positions, in equity, bond, currency and commodities markets, from which they will benefit if the forecasts and judgments about the
future presented in this document do prove to be accurate. Bija Advisors LLC is not liable for any loss or damage resulting from the use of its product.

Copyright 2013 by Bija Advisors LLC.; BijaAdvisorsLLC.com

Reproduction or retransmission in any form, without written permission, is a violation of Federal Statute
Important disclosures appear at the back of this document