Bill Miller is using earthquake forecasting to predict the stock market’s next Big One
▶ He’s using earthquake modeling tools to forecast market risk ▶ “I’m surprised somebody is still messing with that stuff”
When pitching investors, you normally don’t want “hedge fund” and “earthquake” in the same sentence. But Bill Miller, a once-dominant money manager known for quirky thinking, is starting a fund that will make bets based in part on a computer model designed to predict natural disasters.
Called Seismic Value Partners 1, the fund marks Miller’s first foray into hedge funds after decades managing mutual funds at Legg Mason. He won approval last month from the Securities and Exchange Commission to open Miller Value Partners, a money management firm that will oversee his hedge funds. As of a December SEC filing, no money had been raised for the initial Seismic fund.
Miller has licensed a computer model from OpenHazards Group, a Davis, Calif., company run by engineers, mathematicians, scientists, and business executives. The idea is to apply the mathematics of forecasting the probability of seismic activity to the chances of a stock market crash.
Like severe drops in the exchanges, “earthquakes are extreme events,” says Lisa Rapuano, who helped Miller run the Legg Mason Special Investment Trust mutual fund during the 1990s. “This has the potential to help Bill avoid big mistakes, which is one of the downsides of his investment style.”
Miller declined to comment. A decade ago, he was among the bestknown and most-admired stock fund managers in the world, thanks to an astonishing winning streak. His Legg Mason Value Trust fund beat the Standard & Poor’s 500-stock index for 15 consecutive years, from 1991 through 2005. By 2008, when the crisis hit, the fund was heavily invested in financials. It lost 55 percent that year, vs. a 37 percent loss for the S&P 500.
The notion of sidestepping a big loss like that holds an obvious appeal. But some scholars dismiss the idea of applying an earthquake model to stockpicking. “I don’t think it has diddly to do with financial markets,” says Joseph McCauley, a physics professor at the University of Houston and author of Dynamics of Markets: Econophysics and Finance. “I’m surprised somebody is still messing with that stuff.”
OpenHazards Chairman John Rundle, a well-known seismologist who teaches physics and geology at the University of California at Davis, has been adapting his theories on natural disasters and financial markets with help from members of the Santa Fe Institute, a nonprofit research organization where Miller is chairman emeritus and the largest donor.
Miller’s fund will use signals from the model to make daily determinations on whether to purchase or sell short securities that mirror the performance of the U.S. stock market, such as the SPDR S&P 500 exchange-traded fund, according to regulatory documents. The goal is to outperform the S&P 500 over periods of a year or more