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Lily

@nope_its_lily

Mar 31

Want to talk about a recent trade I did (not concluded, FYI) involving capital structure arbitrage. This as always is not a recommendation to buy or sell a specific security and should not be construed as investment advice. 1/

PacWest, like many other banks, has been hit massively due to the ongoing banking crisis. Doubly because it's Californian and has similar exposures as First Republic and Silicon Valley Bank. PacWest common equity remains down about 65% from pre-crisis close.

PacWest also has a capital structure which involves two companies:
Pacific Western Bank (the operating company "opco")
Pacwest Bancorp (the holding company "holdco")

As mentioned in my prior series post, the opco holds the actual assets, and the holdco itself holds equity

Read 28 tweets

Lily

@nope_its_lily

Mar 30

Fellow Californians, I did some work on the best low risk bond mutual funds, ETFs, and money markets you can buy.
Munis are attractive at high tax brackets because they're fully tax exempt for us.
VCTXX - Money market, very low duration, right now 3.68% 7-day SEC yield (!!!)

VWSTX - National munis (fed exempt, state not example), 2.75% 30 day SEC yield
VCLAX - California long duration (15.6 years), can't get without being RIA (ask your financial advisor), 3.47% 30-day SEC yield

NAC - Nuveen California Quality Muncpl IncmFnd, closed end fund (important - trades right now at big discount to NAV!!!), levered, 3.4% yield (tax exempt), 3.97% yield at current market price

Read 4 tweets

Lily

@nope_its_lily

Mar 29

Question for pure factorists:
Other than Fama-French, when people talk about factors we often mean beta to specific pure trends and macro trades (market beta, long term treasuries, commodities/oil), but those have significant collinearity.

There's two major approaches, trading off intelligibility/use as a hedging ratio vs factor stability (do your betas change with adding/subtracting another factor):
1) PCA/other decomposition -- this gives you pure factors, but is unintelligible and cannot be used for hedging

2) Drop out approaches -- this can be as simple as elastic net or other regularization approaches which tend to be unstable (bad for rolling betas) or more complex drop out approaches (testing each factor and hierarchically ranking by preference/information ratio, dropping weak)

Read 8 tweets

Lily

@nope_its_lily

Mar 28

A minor introduction to capital structure:
When most of us think of markets, we think of equities, foreign exchange, and futures (both index and commodity). Even for equities, the most common form is common stock, which is usually for publicly traded businesses the largest

equity holder class. Common stock tends to confer several rights on a business, the most critical being:
- A shareholder vote in proportion to your ownership
- The ability to receive dividends when declared (non-cumulative) from the company
- A claim on a company's assets

However, common stock is just *one* tranche of the entire debt and equity makeup of a company, which we call the capital stack or capital structure of a company.
The golden rule of capital structure is that all classes of equity are subordinate to debt claims in bankruptcy

Read 44 tweets

Lily

@nope_its_lily

Mar 27

The worst part about mucking about in illiquid stuff (long dated single name options, corporate bonds and prefs, etc) is the daily marks can be horrific

Also sometimes you're the entire OI or a good fraction of daily trading volume

Spreads can also make or break your profitability badly. Conversely if you have a real edge or thought on why you're trading, crossing the spread to fill quickly may be prudent.

Read 5 tweets

Lily

@nope_its_lily

Mar 23

One thing I keep coming to and I think most professional investors realize is one of the optimal portfolios is a combination of low correlation carry strategies to fund very positive skew bets.

Both sides individually will eventually destroy you. It’s a known mathematical fact that a well selected (low correlation) group of negatively skewed strategies realizes positive skew. This helps on constructing carry portfolios but improper methods downweight corr1 left tails.

Conversely too concentrated high positive skew bets will likely end up bleeding you on theta to death and don’t work well in practice, especially if focused on a specific mandate like pure tail risk.

Read 4 tweets

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