From the December 2013 issue of Futures Magazine • Subscribe!

Ziemba: Leveraging a lifetime of research

William Ziemba is a researcher, academic, author and trader; not necessarily in that order. 

Ever since launching his academic career as a professor at the University of British Columbia after earning a doctorate from University of California Berkeley, Ziemba has studied market anomalies and put what he found to practical use through his personal trading. 

“No matter where I am in the world I am always trading and watching what is going on,” Ziemba says. 

“It always started with academic work and I have also traded,” Ziemba says. “In my teaching I tend to have theoretical courses but also practical courses that deal with the markets. I tend to be watching [markets to see] what is going on. I think of it as a script. The market is telling you a story, it is supposed to be doing the following and you watch and [ask] ‘is it really doing what you think it is supposed to be doing?’ If not there is trouble.”

Ziemba was a professor from 1968 through 2006 but the academic life allowed time for research and consulting work where he tested his theories. He worked as a consultant with Frank Russell for nine years and also with Morgan Stanley. He has written dozens of academic papers and several books, as well as being a visiting professor at numerous prestigious academic institutions including Cambridge, Oxford, University of Chicago, Stanford and the London School of Economics. 

“First I was doing academic research on the small firm effect and then I got the itch to trade and wrote the first paper on that in 1987,” Ziemba says. He concentrated his research, which would lead to his current trading program, Alpha Z Futures Fund LLC, in three areas: Calendar anomalies, presidential election strategies and option biases. 

Calendar anomalies involve studying the turn of the month effect, turn of the year effect and options expiries. His most recent book, “Calendar Anomalies and Arbitrage,” is based on many of the papers he has written over the years, which he has updated with current data through 2012. 

Presidential election strategies study the divergence in performance between small-cap stock and large-cap stocks depending on who is in the White House, and option biases look at the behavioral biases of the way people trade and attempts to create strategies to exploit that. 

His most powerful strategy is the calendar anomaly that shows that small-cap stocks outperform large-cap stocks in the last few weeks of the year. Ziemba’s research shows that this edge gets supercharged when there is a Democratic president. 

“It turns out that it is more powerful with a Democrat in the White House. For example, even though the regular period is middle of December to the end of December, it actual went to February [in 2013]. Normally it is a two-week period at the end of December,” Ziemba says.  

He says the strategy has worked without fail for 18 years. “I did it for 14 years and consulted with Morgan Stanley and taught it to them,” he says. At the time, 1996, he would buy Value Line Stock Index futures and sell S&P 500 futures, but volume was drying up in the Value Line contract so he decided to retire from consulting and concentrate on his day job and research. 

His research led to a series of well received books  about horse raising odds, which is very applicable to options pricing.

Perhaps that is what drew legendary options trader Blair Hull to reach out to Ziemba. Hull started his impressive trading career counting cards and studying the odds in blackjack and eventually applying those principles to options. 

Hull signed a contract with Ziemba to study anomalies in 2009. “He asked me to study all the anomalies, so we studied a whole bunch. All sorts of things: Options expiry, presidential effect, holiday effect, we studied everything carefully,” Ziemba says. 

The Alpha Z Fund, which began trading client money in July, incudes all three of Ziemba’s major areas of study. His proprietary track record earned 23.46% in 2010, 9.6% in 2011 and 11.77% in 2012. Since officially launching in July, Alpha Z is up 4.1%. A separate institutional account trading the entire year is up 53.62% through October.

Once again the standout strategy is the end of the year effect, which he has traded over the last four years using the Russell 2000 as the small-cap leg. 

 “By having a larger base, I can do more things. I have had strategies I have worked on for years that I never implemented. With a wider base I hope to implement more of them,” Ziemba says. 

The options element involves option writing but from a value perspective. He buys options as well, and often is hedged with futures. 

“All of this hinges on the way people decide to do things,” Ziemba says. “Why is it that the first of the month plus one day [markets] usually go up? The reason is people receive their salary the day before and pension funds have to buy new shares, so there [are] institutional practices and behavioral biases that all fit together. What I try to do is study these things and use them in my trading.”

Ziemba has spent a lifetime studying markets and is now ready to put what he has learned to use for clients.

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