4 ms·

There are strategies that rarely lose money and have a great risk-adjusted profile. But they are generally at least one of a) Not scalable (e.g. most intraday

by crnt2 11y ago

There are strategies that rarely lose money and have a great risk-adjusted profile. But they are generally at least one of a) Not scalable (e.g. most intraday market-making or scalping strategies) b) Only available at a very high fee (think north of 3/30) c) Not available at any price (e.g. Renaissance Medallion, which has been closed to outside investors for 20+ years) So I'm not sure that it's particularly relevant to this discussion, which is about fee pressure on traditional, long-only asset managers.

lordnacho 11y ago
Yeah, I went off on a tangent. The stuff ordinary guys do is very easily systematised by a machine. Problem is the "system" often doesn't do that well (looking at long period numbers, so you get long periods of non performance), so you're back to "trust me, I've done this" and then the guy with the nice marketing docs wins again. Or we'll see. It's a common idea that you might as well follow the market in some way, so maybe cheap will win this time.
paulpauper 11y ago
you can get very high stats (good shapre , low draw-downs, lots of of winning months) just by going 'long' short-duration bonds and or selling far out of money index options. The problem is you may not make much money. You can sell a S&P 500 1000 put but you'll only make $500 over 6-12 months with $100k at risk. However, this is path dependent, meaning that large losses may be sustained on paper until the storm subsides. Even long 3-month t bills gives an infinitely high sharpe but the returns are crap
- melvinmt 11y ago
  > Even long 3-month t bills gives an infinitely high sharpe but the returns are crap If your investment has a high Sharpe ratio (especially in respect to other investments), by definition you have the highest returns at the lowest risk (variance) possible, so you can't have a "infinitely high" Sharpe ratio with "crap" returns. Investments with low returns and low risks are penalized by Sharpe just as much as investments with high returns and high risks for the same reason: the expected value is simply less in both cases than for the ones with highest returns at lowest risk. If you're a hedge/venture fund you will want to optimize for a high Sharpe portfolio eventually, you simply can't survive if you keep losing money for investors in the long run (low expected value).
  - paulpauper 11y ago
    Selling out of the money puts will almost never generate a downdown. Hence an infinite sharpe because the denominator is zero. Technically you are still beating the risk-free rate but there is a lot of downside risk not accounted for in the shapre ratio. Often a huge amount of leverage is applied to boost returns.
    - beagle3 11y ago
      except for the occasional once-in-a-decade event that would bankrupt you. On the time scale where selling out-of-money puts makes sense, the market is efficient and there is no free lunch.
      - cloudjacker 11y ago
        spending a decade high rolling at yacht week is totally worth it though. don't pretend like unsustainable luxury is a bad thing, much better than just dreaming about it also, you can mitigate black swan events by not being too leveraged up, and going further out on expirations. and finally, just keep rolling.
        beagle3 11y ago
        No, you can't mitigate black swans that way. To get any return on selling out of the money put options (with even the remote semblance of sustainability) you have to have a crazy 100x or 1000x leverage. And you can't just going further out on expirations without posting proper margins. That is, you can, but not legally.
- crnt2 11y ago
  I don't think you really understand the Sharpe Ratio - Sharpe = E[Return - Financing] / StDev[Return - Financing] You could only have infinitely high Sharpe if the standard deviation of your returns, minus your financing cost, is zero. That means that Return = Financing + Constant. Now, some people are able to achieve that because they have abnormally low financing (e.g. they are an insurance firm with a large float, or a bank which is able to loan money at a higher rate than it borrows) but for most investors, the only way to make that equation hold is if the constant is zero or negative. Going long 3 month T-bills does not give an infinitely high Sharpe Ratio (if it did, everyone who could would lever it up and do it in large size). As an experiment, I simulated holding a long position in the nearest to expire Eurodollar futures contract (which give a return similar to the 3 month T-bill return) and rolling every 3 months, which gives a Sharpe of 0.92, an annualized return of 0.65% and annualized standard deviation of 0.7%. Similarly, a long position in nearest-month two year treasury futures contracts gives a Sharpe of 0.94 with 1.59% annual return and 1.67% volatility. These are attractive Sharpes (better than equities!) but they are certainly not infinite, and to juice up the returns to anything approaching an equity investment you need to be looking at 5-10x leverage. Your point about selling puts, with skewness/kurtosis risk which is not priced by Sharpe, is a fair one, and probably the most common method of gaming returns, but it is a side-issue.
542458 11y ago
> Renaissance Medallion https://en.wikipedia.org/wiki/Renaissance_Technologies#Medallion_Fund https://en.wikipedia.org/wiki/Renaissance_Technologies#Medal... > "From 2001 through 2013, the fund’s worst year was a 21 percent gain, after subtracting fees. Medallion reaped a 98.2 percent gain in 2008, the year the Standard & Poor’s 500 Index lost 38.5 percent." Holy cow, that thing is kinda crazy. There has to be a catch, right? (Or everybody would be doing it.) Or is their algorithm genuinely so clever that nobody else has ever figured it out?
- bradleyjg 11y ago
  They were (one of?) the first serious quant fund, started by James Simon who before that was a math professor at Stony Brook. Along with the NSA they are one of the most aggressive non-academic would be employers of top notch math Phds. They also hire Phds in physics and statistics. The big draw isn't so much the salary as the ability to invest in Medallion. If you take some of the smartest people in the world and have them intensely focus on making money via trading you get Renaissance. Everyone can't do it because there are only so many some of the smartest people in the world intensely interested in making money via trading to go around.
  - nswanberg 11y ago
    A side-note on the smart people: Nick Patterson, a cold-war cryptologist who had worked at Renaissance for a few years, talked a little about how they had employed some very smart people doing some very basic things like simple regression, and that the people needed to be smart to know how to apply these tools properly, and ensure the data they were applying it on was good. http://www.thetalkingmachines.com/blog/2016/2/26/ai-safety-and-the-legacy-of-bletchley-park http://www.thetalkingmachines.com/blog/2016/2/26/ai-safety-a...
  - btilly 11y ago
    Everyone can't do it because there are only so many some of the smartest people in the world intensely interested in making money via trading to go around. No, everyone can't do it because they are in an 0-sum game. If everyone was as good as Renaissance, then Renaissance wouldn't make money. But if all the smart people are in Renaissance, then Renaissance makes money.
deleted 11y ago
[deleted]
p4wnc6 11y ago
Traditional, long-only asset managers are still hired mostly out of some combination of nepotism, status signalling, cover-your-ass advisory board issues. When I worked in a long-only equities asset manager, there even were frank discussions with the client services team about how to organize materials for when a client was preparing to fire us. We actually assisted them with the process of firing us, told them what to say, etc., so they would save face with the rest of the board or whomever they answered to. Basically, it's a lot like hiring a manager in international soccer. Very few of them actually bring results, but big, wealthy clubs will still go through a huge media circus, pay a huge wage, and do all sorts of things, to hire status-signalling managers. Then, later, when it's not working out, it is that manager's job to be sacked gracefully, once again creating media buzz that makes the club look good in front of the fan base for "doing the right thing" and firing the manager. In asset management it's the same. "Hire-us-now-to-look-fancy" and "Fire-us-later-to-look-like-you're-dedicated-to-ideals-and-righting-the-wrongs" are both very much the major parts of the services they provide, and both are things that these companies go on at length about when courting a new prospective client. Heck, some client service employees even get part of their bonuses based on how happy the clients are with the assistance they receive in drafting press releases, putting together slide decks, or writing white papers about firing that manager.

by crnt2 11y ago

lordnacho 11y ago

Yeah, I went off on a tangent. The stuff ordinary guys do is very easily systematised by a machine. Problem is the "system" often doesn't do that well (looking at long period numbers, so you get long periods of non performance), so you're back to "trust me, I've done this" and then the guy with the nice marketing docs wins again. Or we'll see. It's a common idea that you might as well follow the market in some way, so maybe cheap will win this time.

paulpauper 11y ago

you can get very high stats (good shapre , low draw-downs, lots of of winning months) just by going 'long' short-duration bonds and or selling far out of money index options. The problem is you may not make much money. You can sell a S&P 500 1000 put but you'll only make $500 over 6-12 months with $100k at risk. However, this is path dependent, meaning that large losses may be sustained on paper until the storm subsides. Even long 3-month t bills gives an infinitely high sharpe but the returns are crap

melvinmt 11y ago
> Even long 3-month t bills gives an infinitely high sharpe but the returns are crap If your investment has a high Sharpe ratio (especially in respect to other investments), by definition you have the highest returns at the lowest risk (variance) possible, so you can't have a "infinitely high" Sharpe ratio with "crap" returns. Investments with low returns and low risks are penalized by Sharpe just as much as investments with high returns and high risks for the same reason: the expected value is simply less in both cases than for the ones with highest returns at lowest risk. If you're a hedge/venture fund you will want to optimize for a high Sharpe portfolio eventually, you simply can't survive if you keep losing money for investors in the long run (low expected value).
- paulpauper 11y ago
  Selling out of the money puts will almost never generate a downdown. Hence an infinite sharpe because the denominator is zero. Technically you are still beating the risk-free rate but there is a lot of downside risk not accounted for in the shapre ratio. Often a huge amount of leverage is applied to boost returns.
  - beagle3 11y ago
    except for the occasional once-in-a-decade event that would bankrupt you. On the time scale where selling out-of-money puts makes sense, the market is efficient and there is no free lunch.
    - cloudjacker 11y ago
      spending a decade high rolling at yacht week is totally worth it though. don't pretend like unsustainable luxury is a bad thing, much better than just dreaming about it also, you can mitigate black swan events by not being too leveraged up, and going further out on expirations. and finally, just keep rolling.
      - beagle3 11y ago
        No, you can't mitigate black swans that way. To get any return on selling out of the money put options (with even the remote semblance of sustainability) you have to have a crazy 100x or 1000x leverage. And you can't just going further out on expirations without posting proper margins. That is, you can, but not legally.
crnt2 11y ago
I don't think you really understand the Sharpe Ratio - Sharpe = E[Return - Financing] / StDev[Return - Financing] You could only have infinitely high Sharpe if the standard deviation of your returns, minus your financing cost, is zero. That means that Return = Financing + Constant. Now, some people are able to achieve that because they have abnormally low financing (e.g. they are an insurance firm with a large float, or a bank which is able to loan money at a higher rate than it borrows) but for most investors, the only way to make that equation hold is if the constant is zero or negative. Going long 3 month T-bills does not give an infinitely high Sharpe Ratio (if it did, everyone who could would lever it up and do it in large size). As an experiment, I simulated holding a long position in the nearest to expire Eurodollar futures contract (which give a return similar to the 3 month T-bill return) and rolling every 3 months, which gives a Sharpe of 0.92, an annualized return of 0.65% and annualized standard deviation of 0.7%. Similarly, a long position in nearest-month two year treasury futures contracts gives a Sharpe of 0.94 with 1.59% annual return and 1.67% volatility. These are attractive Sharpes (better than equities!) but they are certainly not infinite, and to juice up the returns to anything approaching an equity investment you need to be looking at 5-10x leverage. Your point about selling puts, with skewness/kurtosis risk which is not priced by Sharpe, is a fair one, and probably the most common method of gaming returns, but it is a side-issue.

542458 11y ago

> Renaissance Medallion https://en.wikipedia.org/wiki/Renaissance_Technologies#Medallion_Fund https://en.wikipedia.org/wiki/Renaissance_Technologies#Medal... > "From 2001 through 2013, the fund’s worst year was a 21 percent gain, after subtracting fees. Medallion reaped a 98.2 percent gain in 2008, the year the Standard & Poor’s 500 Index lost 38.5 percent." Holy cow, that thing is kinda crazy. There has to be a catch, right? (Or everybody would be doing it.) Or is their algorithm genuinely so clever that nobody else has ever figured it out?

bradleyjg 11y ago
They were (one of?) the first serious quant fund, started by James Simon who before that was a math professor at Stony Brook. Along with the NSA they are one of the most aggressive non-academic would be employers of top notch math Phds. They also hire Phds in physics and statistics. The big draw isn't so much the salary as the ability to invest in Medallion. If you take some of the smartest people in the world and have them intensely focus on making money via trading you get Renaissance. Everyone can't do it because there are only so many some of the smartest people in the world intensely interested in making money via trading to go around.
- nswanberg 11y ago
  A side-note on the smart people: Nick Patterson, a cold-war cryptologist who had worked at Renaissance for a few years, talked a little about how they had employed some very smart people doing some very basic things like simple regression, and that the people needed to be smart to know how to apply these tools properly, and ensure the data they were applying it on was good. http://www.thetalkingmachines.com/blog/2016/2/26/ai-safety-and-the-legacy-of-bletchley-park http://www.thetalkingmachines.com/blog/2016/2/26/ai-safety-a...
- btilly 11y ago
  Everyone can't do it because there are only so many some of the smartest people in the world intensely interested in making money via trading to go around. No, everyone can't do it because they are in an 0-sum game. If everyone was as good as Renaissance, then Renaissance wouldn't make money. But if all the smart people are in Renaissance, then Renaissance makes money.

deleted 11y ago

[deleted]

p4wnc6 11y ago

Traditional, long-only asset managers are still hired mostly out of some combination of nepotism, status signalling, cover-your-ass advisory board issues. When I worked in a long-only equities asset manager, there even were frank discussions with the client services team about how to organize materials for when a client was preparing to fire us. We actually assisted them with the process of firing us, told them what to say, etc., so they would save face with the rest of the board or whomever they answered to. Basically, it's a lot like hiring a manager in international soccer. Very few of them actually bring results, but big, wealthy clubs will still go through a huge media circus, pay a huge wage, and do all sorts of things, to hire status-signalling managers. Then, later, when it's not working out, it is that manager's job to be sacked gracefully, once again creating media buzz that makes the club look good in front of the fan base for "doing the right thing" and firing the manager. In asset management it's the same. "Hire-us-now-to-look-fancy" and "Fire-us-later-to-look-like-you're-dedicated-to-ideals-and-righting-the-wrongs" are both very much the major parts of the services they provide, and both are things that these companies go on at length about when courting a new prospective client. Heck, some client service employees even get part of their bonuses based on how happy the clients are with the assistance they receive in drafting press releases, putting together slide decks, or writing white papers about firing that manager.