The debate over EMH should perhaps be framed as "What skill level and assets under management do I need to make it worthwhile to play the markets instead of doing passive investing?" This is a list of anti-EMH evidence (that I personally came across in my relatively short exploration into the public markets), in the sense that they've updated me towards thinking that the levels are not as high as I had thought. (Compare with "Modern Edges are Completely Ridiculous" section in The EMH Aten't Dead.)

Negative extrinsic value for HYLN warrants

Warrants are similar to call options, in that you get the right to purchase shares of common stock at a set price, which is $11.5 for HYLN warrants. However HYLN commons have been trading at $15-$16 above HYLN warrants. There are some complications including that HYLN warrants are not exercisable right now and won't be for a few days to weeks until SEC approves some filings, but it's still hard to explain the negative extrinsic value assuming EMH. (Many SPAC stocks exhibit this, not just HYLN.)

(This was written some days ago and the warrants have since become exercisable, and the price gap has closed.)

Equivalent asset arbitrage

Two securities (symbols to come later as this is still being actively traded) are supposed to give the same dividend stream. The company's official website states that they are meant to be economically equivalent. Until recently these two symbols have been priced very close to each other, but one asset started trading at a premium to the other in the last few weeks, sometimes >10%, with the delta swinging back and forth over this time period creating repeated arbitrage opportunities.

AHT commons versus preferred

There was an exchange offer that expired on Nov 20, where 1 preferred share of AHT could be exchanged for 5.58 shares of AHT common stock, but AHT commons have been trading at way above 1/5.58 the price of AHT preferred and was as high as 1/2 in the last couple of days before expiration (technically Nov 17 and 18, because if you bought on Nov 19 or 20, the shares wouldn't settle in time to participate in the exchange). The risk of the exchange offer being canceled or changed doesn't seem nearly high enough to explain this, and in fact the exchange did go through at the 1:5.58 ratio.

Senseless HTZ spike on DIP news

I previously mentioned this on Open Thread. To quote a commenter (on a paid subscription website):

For the last several months HTZ shares were slowly deteriorating and by the middle of this month actually got quite close to dropping below $1/share. Then at the end of last week couple of events caused HTZ shares to skyrocket +143% on a $2.5bn volume (for a bankrupt stock!):

– On the 16th of October, HTZ announced a new $1.65bn DIP (debtor in possession) financing. It seems that the market (or overly excited retail crowds) views this as an extremely positive sign indicating that HTZ is still able to raise money and will come out of bankruptcy soon. However, I think that equity still remains pretty much worthless here, while the timeline of the whole process is even more questionable now. The company continues to intensively burn cash (in August alone $84m cash was burned in operations) and the size of the new DIP indicates that the trend is not going to stop soon. Initially, at the time of the bankruptcy announcement, the company intended to raise $1bn equity, while DIP seemed not to be in the cards at all. September DIP overview filings show estimated DIP sizing at $1.1bn – $1.5bn, while the recently announced deal is substantially larger than this range. Back in August (Q2 report) the company stated that “there is a significant risk that the holders of our common stock will receive no recovery under the Chapter 11 Cases and that our common stock will be worthless”, and this current financing pushes shareholders even further down in the seniority ranking. Regarding the timing, it seems that DIP lenders do not expect the bankruptcy process will be rather extended: “The DIP Facility matures on December 31, 2021, and has limited covenants and events of default, including one milestone requiring the filing of a Chapter 11 Plan by August 1, 2021.”

– Apparently, the delisting hearing with NYSE was supposed to take place on the 15th of October, however, no updates were issued and so far HTZ remains listed. It seems that the market has understood this as a sign that HTZ will not get delisted. I don’t think the assumption is correct and we still should wait for the actual update from the exchange. The newly received loan gives the company more flexibility and survival time, however, it still doesn’t put HTZ in “sound financial health”, which is one of the requirements to regain compliance with the listing requirements.

Overall, it is hard to explain the almost 2.5x equity valuation increase on Friday. It was likely a combination of hype pumping, short-squeeze, and algo-trading. This remains to be an interesting case to track (definitely not investable neither on the long nor short sides though).

Contra "not investable", I did sell call options into the spike and made a nice profit, although it was nerve-racking at times.

Three "risk-free" assets that rose 70-200% in 2 months

("Risk-free" in the sense of not being significantly more risky than short term treasuries.) A SPAC is a "blank check" company that gathers money from investors at IPO, puts that money into a trust account (which are invested in short-term treasuries or money-market equivalents), then finds a private company to merge with (in order to deliver the IPO proceeds to that company and to make it publicly traded). Before the merger is finalized, each shareholder can request to "redeem" their shares for their share of the money in the trust account (called NAV or redemption value, typically around $10). Because of this, it's "impossible" to lose money buying a SPAC stock at price=NAV or below as long as you hold it until redemption time. I did this with three SPAC stocks, symbols GMHI (now LAZR), TRNE, and HCAC, and their prices have since gone up 70-200%. I bought these on portfolio margin and financed them with box-spread financing so the opportunity cost of holding them was also very low.

(Technically I bought these at slightly above NAV, and brought their effective prices below NAV by selling November call options against them. I also bought some other SPACs but these three were/are my biggest positions by far.)

How I noticed or came across these

  • I've been following SPAC stocks (due to hearing about the NKLA debacle from friends and in the financial press) and the discount of warrants relative to commons is frequently mentioned on r/SPACs.
  • For the equivalent asset arbitrage I was holding one of the securities in a dividend portfolio (for my parents), saw a big runup in its price, and thought of checking its price relative to its twin (which I knew about from previous research) just in case, and happened to see a significant price difference.
  • For HTZ, I was already short HTZ due to an earlier irrational price spike which I read about in the news.
  • For AHT, I read an article about the exchange offer and the arbitrage opportunity it represented on SeekingAlpha a couple of months ago, and then observed the opportunity get much bigger in the last few days just before the offer expiration.
  • For the "riskless" assets, buying SPACs while they're near NAV to sell later is a strategy frequently mentioned on r/SPACs. I picked these three stocks myself (due to their being related to tech and electric vehicles) and independently thought of selling calls to bring their effective prices below NAV.

Addendum: Help me time the SPAC bubble

With GMHI/LAZR, I sold 80% of my position while the prices were around 16-17, and it's now around 32. This was partly because I thought I had a tendency to close my trades too late and wanted to correct for that, and partly because I had observed a previous SPAC bubble deflate in real time, and every downturn in prices reminded me of that. My initial positions were large enough and these stocks have gone up enough that the remaining positions now represent nearly 50% of the net value of my investment portfolio. So, any advice, either theoretical or practical, on what to do with TRNE and HCAC, which have mergers coming up soon, which (judging from history of other SPACs) implies likely further price increases as long as the current SPAC bubble stays inflated?

(I seem to recall a recent LW post recommending not to time bubbles, but can no longer find it. A link would be appreciated.)


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My impression is that market efficiency varies a lot from year to year.

Recessions tend to be associated with less efficient markets. I presume that's because it takes a lot more capital to correct mispricing when the overall market makes large moves.

If a phenomenon only exists one year per decade, then it's less valuable to have enough liquid capital to exploit it, fewer people have the patience needed to remain alert enough to notice it, etc.

2020 has had mispricings that seem more unusual than once per decade phenomena.

I would worry in a lot of these cases that there's some risk that your model isn't taking account of, so you could be "picking up pennies in front of a steamroller". Not in all cases though - 70-200% isn't pennies.

But things like supposedly equivalent assets that used to be closely priced now diverging seems highly suspicious.

Most of the risk premium in investing is for negative skewness risk; it's compensation for the fat tail. And this includes the basic "buy and hold the stock index" strategy. Penny-picking isn't something to avoid. It's the investor's bread and butter. Because compensation for risk is compatible with the EMH, opportunities are not hard to find. The pennies can more than add up to the cost of occasionally getting run over, but only if you survive getting run over with enough left to keep playing the game. That means one must diversify as much as possible and not bet over Kelly.

But all of that is just a foundation of smart beta. To do any better, one has to find the alpha: actual market anomalies incompatible with the EMH. One doesn't always know which is which.

Gilch made a good point that most investing is like "picking up pennies in front of a steamroller" (which I hadn't thought of in that way before). Another example is buying corporate or government bonds at low interest rates, where you're almost literally picking up pennies per year, while at any time default or inflation could quickly eat away a huge chunk of your principle.

But things like supposedly equivalent assets that used to be closely priced now diverging seems highly suspicious.

Yeah, I don't know how to explain it, but it's been working out for the past several weeks (modulo some experiments I tried to improve upon the basic trade which didn't work). Asked a professional (via a friend) about this, and they said the biggest risk is that the price delta could stay elevated (above your entry point) for a long time and you could end up paying stock borrowing cost for that whole period until you decide to give up and close the position. But even in that case, the potential losses are of the same order of magnitude as the potential gains.

Agreed -- conditional on the EMH holding, I think the most likely explanation is that you're taking on risk you're not aware of. If this is indeed the case, I'd expect a traditional financial advisor to be able to pick up on it very quickly, and so I'm curious what such a person has to say.

If that's not the case, my guess is that the quants on wall street are bogged down in some kind of inflexible process that prevents them from targeting the opportunities you're going for. That feels like a stretch, though. Or maybe it's some kind of knowledge that's illegible to a trading bot?

Personally, this is still an update in the direction of "I should be browsing obscure financial subreddits"

The US presidential election has already ended but for weeks since it concluded people outside the USA (and arguably inside the USA) have been able to bet on it. At this point, it is very clear that Trump will not become president. But you can still make 20%+ returns shorting 'TRUMPFEB' on FTX. As recently as the 24th you could make 30%+. These markets resolve on Feb 1st. This easily 'beats the market' even if you give Trump a 1% chance and accept some counter-party risk.

I can think of various other ways to easily get 10%+ returns in months in the crytpo markets. For example several crypto futures are extremely underpriced relative to the underlying coin. At this point, I am wondering why the EMH was ever held in such high regard on lesswrong. These markets have fairly high liquidity. You could have gotten in millions of dollars. 

One common response is "If you are right why are you not amazingly rich?". This seems to assume that being right means you can convince people to give you tons of capital to work with. It is unclear why 'being right' would get you rewarded in this way. Notably even if you post advice publicly and it works you do not magically get billions of dollars. For example, I told people to Bet on Biden. Joe Biden did win but I did not make millions off this. Grey enlightenment has been posting very good financial advice for years and is likely quite wealthy. But I predict he is not a billionaire and does not run a hedge fund. His long and very good track record does not magically cause him to have access to billions in capital to invest.

At this point, it is very clear that Trump will not become president. But you can still make 20%+ returns shorting ‘TRUMPFEB’ on FTX.

There is a surprisingly large number of people who believe the election was clearly "stolen" and the Supreme Court will eventually decide for Trump. There's a good piece in the NYT about this today. Should they think that the markets are inefficient because they can make 80% returns longing ‘TRUMPFEB’ on FTX? Presumably not, but that means by symmetry your argument is at least incomplete.

I can think of various other ways to easily get 10%+ returns in months in the crytpo markets. For example several crypto futures are extremely underpriced relative to the underlying coin.

This sounds more like my cup of tea. :) Can you provide more details either publicly or privately?

I sent you a pm

TRUMPFEB is trading at 0.103 and has been under 0.12 for a while. Do you mean levered returns?

Yeah, to get 20%+ you have to lever up. You can either use other investments on ftx as collateral to avoid liquidation (there are many attractive ones including copies of SPY) or you have to tolerate some liquidation threshold.

Can you explain how the leverage system works on FTX for TRUMPFEB? The calculator on the site seems to produce bizzare results. 

I'm interested as well.

I too am interested in the crypto opportunity.

Also interested in the crypto opportunity.

I'm also interested in this!

I'm interested in this and would also love to chat!

Thanks for the post. Here is Vaniver's comment arguing against timing markets that I really liked, but it was mostly using it as an analogy for when to get out of countries, because there isn't a big cash prize if you time it right, and if you're wrong you get killed or something.

Thanks for the link. I was hoping that it would be relevant to my current situation, but having re-read it, it clearly isn't, as it suggests:

It’s much less risky to just sell the stocks as soon as you think there’s a bubble, which foregoes any additional gains but means you avoid the crash entirely (by taking it on voluntarily, sort of).

But this negates the whole point of my strategy, which is to buy these stocks at a "risk-free" price hoping for a bubble to blow up later so I can sell into it.

Yeah, I don't think that advice applies to your situation. [In my way of thinking about things, you were trying to time the market less than you had skill for, and are now attempting to adjust towards calibration.]

So, any advice, either theoretical or practical, on what to do with TRNE and HCAC, which have mergers coming up soon, which (judging from history of other SPACs) implies likely further price increases as long as the current SPAC bubble stays inflated?

IMO, the first problem here is psychological: you need to decide whether you're doing something more like regret-minimization or more like profit-maximization.

In the regret-minimization world, I think the dominant strategy is deciding on (and then adjusting as new info comes in) price schedules. Think "If it hits $20, I'll sell to this fraction; if it hits $21, I sell to this other fraction, etc." or "Each day from here to the merger date I'll sell f(t)% or $N of the remaining stock I hold" or whatever. The thing that's going on here is that, regardless of whatever actually happens, you can point to your strategy and say "I did the thing that I believed would do well across all possible worlds, and so rather than focusing too much on whether or not this me did well or poorly, I focus on whether I believe in my strategy for expected gains."

I called it the 'profit-maximization' world, but in my mind it's actually closer to the 'hug the query' world; rather than trying to come up with a strategy that defends against future-you criticizing present-you, you try to figure out which world you're actually in, and put both your computation / emotions / resources into that. Sleepless nights worrying about prices is one of the tools used here; when you make a move and then regret it in the future, that regret is you learning what to do the next time.

There's obviously gradations here; the point is not to maximize hard in one direction, but to have a unified and coherent approach to how your emotions will interact with your investing, and how your investing will interact with your emotions. Once you have that, I think things flow more clearly.

[If I were trying to correct short-term inefficiencies, the first strategy I would try is a leaderboard-like one, where I'm both tracking the ~5 bets that I'm in, and also tracking the ~25 bets that I would be in if I weren't in them, and using that as my judge of whether or not to stay in; what matters is not whether ABC went up when I wasn't in it, or went down when I was, but whether being in ABC was better or worse than being in DEF.]

Market efficiency doesn’t come from the magic all-knowing Omega, it comes from a lot of traders looking for inefficiencies, exploiting them and thus closing them. Broadly speaking, there are 2 ways to do it: manually and algorithmically.

Manual trading is slow. A person has to find some information, reason about it and make the trade. This happens at the days/weeks/months scale, so for some non-negligible time the opportunity persist. If you have the proper mindset that allows noticing inefficiencies like those in the examples and you happen to notice them first, you can exploit them.

Only algorithmic trading allows to react instantaneously and remove inefficiencies beyond millisecond scale. However, it is not flexible. You need a big upfront investment in time and money to notice the inefficiency, develop and backtest your strategy, etc. This only makes sense for regular, systematic inefficiencies.  AHT and HTZ examples just cannot be handled by algo trading.

Equivalent asset arbitrage (and stat arb) is a perfect fit for algo trading. However, we still sometimes see huge inefficiencies there. How could it happen? The arbitragers have risk limits and these risk limits can get overwhelmed by market dynamics. Suppose there are 2 assets A and B that are either formally the same (as in the Wei Dai’s example) or are almost the same (e.g. BTC swap and spot prices). There are professional arbitragers with some total cumulative capital. When the spread diverges, they bet on the convergence and by doing so make it converge. Normally, everything is ok and the spread is minimal and almost unexploitable. However, under extreme market conditions (e.g. LTCM or Bitmex BTC Swap price liquidations cascade in March 2020) the professional arbitrageurs run out of capital and spread diverges greatly. They know that it will eventually converge, but they have no free capital anymore. This is an excellent opportunity for non-professionals to bet manually on the spread convergence and earn a lot of money with moderate risk.

Sometimes, obvious moderate inefficiencies persists for a long time even under normal market conditions. For example, right now, Deribit June BTC futures trade at 10% premium to the spot price (20k vs 19k). You can just buy BTC for your USD, deposit it on Deribit and fully hedge your BTC exposure by selling June futures. Hold your position until the spread converges (it usually happens in a few months) or in the worst case till expiry. This trade gives you 20%-60% annualised return. Your risk is only the counterparty risk which is not non-existent, but I would say << 5% annualised.

Why does this future spread opportunity persist? I don’t really understand. At the first glance, anybody can take advantage of it. There is nothing fancy here. The asset is very well known. The exchange is rather well known and you can get a slightly worse opportunity on other exchanges like Bitmex. However, when I tried explaining it to my friend who has some investment in stock ETFs he didn’t understand. My hypothesis is that there is just not enough capital in the world understanding such opportunity and being allowed to use it legally and not having even better uses. If it is true, the bar for outperforming “buy and hold stock ETF” is really, really low. 

I'm bit confused about the Deribit trade. I can see that you can hedge your position with this trade, but I don't understand how you get the return?

The futures price will converge to the spot price as expiration draws near, but this is not necessarily the spot price you paid... I must be missing something... Any pointer?

The basic idea is this. Let's say you buy a bitcoin at 23k USD and sell the BTC futures contract for 25k. At expiration date (or sooner) you will get 25k but will have to handover the bitcoin you paid 23k for. No matter the spot price at that point you will still have made 2k (minus fees). If bitcoin has gone up to 30k you are giving away an asset worth 30 in return for 25k, but you still made a profit since you bought it for 23k. But be aware that the high bitcoin volatiliy can eat your margin account.

Two securities (symbols to come later as this is still being actively traded)

Are you trading at a scale where this is relevant? The vast majority of symbols have volumes where a mere mortal's bank account won't move the market at all.

Great post overall! There seems to be a lot of recent interest on LW around playing the markets well. I'd love to set up a Discord for ongoing discussion and brainstorming, if there's interest.

I've been sitting on a good nugget of crypto earnings for years and have had a lot of analysis paralysis about diversifying into the real markets and/or arbitraging the highly volatile crypto options/futures markets directly. If anyone reading this is interested in a serious discussion, please reach out!

Interested in the discord discussion!

Help me time the SPAC bubble

My basic approach with bubbles is balancing. Think in terms of risk exposures rather than entries and exits.

Consider how far the price might drop when the bubble finally pops (sometimes that's to zero) and consider how many dollars you're willing to lose on the bet. So, in the case of something that could drop to zero, that means never leaving any more than your maximum loss in dollars in the investment. As the bubble inflates, sell off shares to stay below that value. That means you're locking in gains. When it does finally pop, most of what's left at risk in there might evaporate, but you've kept your profits on the way up. If you think the floor is some value higher than zero, then you risk a fixed amount above the floor.

If it dips significantly, it might be about to pop, or it might just be a swing on its way up. Try to keep your risk constant by putting more dollars in. This can be hard. Be systematic rather than emotional. E.g. maybe pre-commit to putting more dollars in once your investment's value drops below 90% of your max risk. But don't trade too often or you'll burn too much in transaction costs. The exact details of your system are less important than actually using a system.

You might run into granularity issues if the price of a single share is above your risk target. At that point, you're done. Sell your last share and get out.

This is pretty much the strategy you'd get by Kelly betting (or fractional Kelly betting) on a strategy that's a small part of your portfolio. For multiple simultaneous strategies that are a significant fraction of your portfolio, Kelly will also make you balance strategies against each other instead of just against cash.

Can we do any better than this?

Unless you've analyzed a real anomaly that lets you predict the crash better than the market, then the answer is probably "No." Although, if there are derivatives like options or futures or correlated assets, then maybe you have more (heh) options on how to trade this.

But there's so much noise in the markets that it takes a lot of data to try and predict things better than the current price. A SPAC that only lasts two years is not going to have enough price history. But sometimes price anomalies cut across entire sectors. If you can aggregate returns data from multiple SPACs, then maybe you can try to analyze factors that apply to all of them (or most of them). The basic process is like I described in Charting Is Mostly Supersition. Sometimes you can find an anomaly that lets you predict things a little better than chance. Even small edges can be very valuable.

These SPAC options have really high implied volatility. Makes me want to sell them. The market tends to overestimate option volatility around known events because demand for options is very high at those times. Maybe a SPAC acquisition is similar. I'm not sure.

A covered call, or equivalently, a deep-in-the-money cash-covered put seems like a pretty good bet. The puts are simpler since you don't have to buy the shares, but the calls probably have better liquidity. If the bubble keeps inflating, you can keep some of that upside. If it pops, the premium from the option makes it hurt less. And you don't expect the shares to end up worth less than $10, which limits the risk even more.

Out-of-the-money short puts also look promising. Between the premium and the $10 floor, the 12.5 May puts on both HCAC and TRNE look like free money right now. If it does end at $10 in May, you get nothing, but if there's a vol crush or price spike between now and then, you could exit and collect most of it early.

I'm also wondering about exotic spreads between the options and the warrants. The warrants seem a lot cheaper than the options. +27 HCACW / -1 HCAC 17.5 call (any date) also looks like free money right now.

[Epistemic status: thinking aloud about how else I might trade this. Not investment advice. There may be risks I'm not seeing yet. Don't bet the farm.]

  • I'm now selling at-the-money call options against my remaining SPAC shares, instead of liquidating them, in part to capture more upside and in part to avoid realizing more capital gains this year.
  • Once the merger happens (or rather 2 days before the meeting to approve the merger, because that's the redemption deadline), there is no longer a $10 floor.
  • Writing naked call options on SPACs is dangerous because too many people do that when they try to arbitrage between SPAC options and warrants, causing the call options to have negative extrinsic value, which causes people to exercise them to get the common shares, which causes your call options to be assigned, which causes you to end up with a short position in the SPAC which you'll be forced to cover because your broker won't have shares available to borrow. (Speaking from personal experience. :)

I closed my HCAC put at a small profit today.

Looks like HCAC wants to acquire Canoo. Roth Capital analysts are targeting $30.

Looks like TRNE became Desktop Metal Inc. (DM). I had sold a 12.5 May put on TRNE and closed it today by buying back the DM put at a profit.

causing the call options to have negative extrinsic value, which causes people to exercise them

Duly noted. That seems like a good time to buy back the calls. And then buy some more to exercise yourself. Not sure how long this lasts. Maybe it's enough to watch it twice a day, or maybe you have to program an order in advance.

Once the merger happens [...], there is no longer a $10 floor.

How much warning do we get to redeem the shares? Maybe that's when you buy back the put. Although, if everybody thinks that at once and drives up the IV even more, maybe that's time to sell another one instead.

Two securities (symbols to come later as this is still being actively traded) are supposed to give the same dividend stream. The company's official website states that they are meant to be economically equivalent.


I don't know exactly what is happening here, and this seems like a strange situation - but there are cases where different securities with identical rights to dividends have different value because they have different voting rights or similar, with implications for pricing if there are rumors of corporate takeovers, for example. Similarly, the fact that they are intended to be equivalent isn't necessarily a binding requirement, and I imagine that  if large investors decide to preferentially buy one class, they could push for changes.

Technically I bought these at slightly above NAV, and brought their effective prices below NAV by selling November call options against them.

How does that work and what’s the downside of that trade?

In addition to jmh's explanation, see covered call. Also, normally when you do a "buy-write" transaction (see above article), you're taking the risk that the stock falls by more than the premium of the call option, but in this case, if that were to happen, I can recover any losses by holding the stock until redemption. And to clarify, because I sold call options that expired in November without being exercised, I'm still able to capture any subsequent gains.

Just curious but where are you trading/investing? USA or elsewhere? I'm wondering about the type of options -- are they USA or European execution rights?

And, yes, I should have been clear on the potential downside of limiting gain to "during the life of the option"

Sounds like he sold call options - the obligation to deliver some set number of shares at a set price to the person buying the call option - against the shares he bought. Since he got paid for selling the call options those funds can be linked to the purchase price (and I believe under current US tax law will be linked if the call options are exercised by the person owning those rights) effectively reducing the original cost of buying the assets shares. 

If the per share earned on the call options sold is greater than the NAV premium paid for the underlying asset shares, then you effectively bought the shared below NAV.

The down side is that it locks in the potential gains of owning the underlying asset shares -- someone else has basically bought the right to all the gains above the strike price of the options. 

My suspicion about the thin-tailed risk here is that either congress or the SEC passes landmark regulation about SPACs (which is potentially plausible) and those stocks go to 0, very quickly, as the initial investors who IPOed the SPAC pull their money out.  See, ICOs (though those were obviously higher risk)