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> A 3 year track record is plenty long enough to prove out a system and provide a track record. It's a troubling sign that there is only $20 million in his fund

by dsacco 9y ago

> A 3 year track record is plenty long enough to prove out a system and provide a track record. It's a troubling sign that there is only $20 million in his fund if. I'm curious as to why you say a 3 year track record is long enough to prove a system. I don't necessarily disagree (though I think number of trades executed in that timespan and the type of trading strategy might be as important as the timespan itself), but I'm interested in your reasoning.

chollida1 9y ago
Sure, great question. It's important to note that 3 years doesn't mean 3 data points. It really depends on the funds average trade horizon. Which is, I think, exactly what you were referring to. An HFT firm trades at such small scales that it can use its daily returns such that each year actually provides 252 data points. On the other side of the coin, Berkshire Hathaway would need benchmark times longer than a single year. I'm assuming the fund has holding times of around a week based on intuition and prior knowledge of alto of different fund investment structures. The thing to understand about hedge funds is that most of them change investment strategies at some point in their lifetime such that historical records no longer really apply. This can happen for a number of reasons: 1) markets get crowded and force people to search for alpha somewhere else 2) funds get larger and existing strategies don't have the capacity to manage the new money. 3) traders leave and new traders have new ideas. 3 year is an industry goldilocks mark for comparing hedge funds. Not too long to take into account old strategies that are no longer employed and not too short that it doesn't allow the strategies to play out. I cant' remember the exact number but Victor Haghani of LTCM fame talked about this and said it would be something like 143 years of data to know if a biased coin that comes up heads 60% of the time is biased to a 95% confidence level. Obviously this isn't workable and as such we have to use smaller time frames. See: http://labs.elmfunds.com/pastreturns http://labs.elmfunds.com/pastreturns https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2856963 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2856963
- dsacco 9y ago
  Yeah, that all makes sense, thanks. I figured you were using that 3 year figure with an implicit acknowledgement that it would provide greater or lesser rigor depending on the number of trades and the holding time. Thanks for the resources as well.

by dsacco 9y ago

chollida1 9y ago

Sure, great question. It's important to note that 3 years doesn't mean 3 data points. It really depends on the funds average trade horizon. Which is, I think, exactly what you were referring to. An HFT firm trades at such small scales that it can use its daily returns such that each year actually provides 252 data points. On the other side of the coin, Berkshire Hathaway would need benchmark times longer than a single year. I'm assuming the fund has holding times of around a week based on intuition and prior knowledge of alto of different fund investment structures. The thing to understand about hedge funds is that most of them change investment strategies at some point in their lifetime such that historical records no longer really apply. This can happen for a number of reasons: 1) markets get crowded and force people to search for alpha somewhere else 2) funds get larger and existing strategies don't have the capacity to manage the new money. 3) traders leave and new traders have new ideas. 3 year is an industry goldilocks mark for comparing hedge funds. Not too long to take into account old strategies that are no longer employed and not too short that it doesn't allow the strategies to play out. I cant' remember the exact number but Victor Haghani of LTCM fame talked about this and said it would be something like 143 years of data to know if a biased coin that comes up heads 60% of the time is biased to a 95% confidence level. Obviously this isn't workable and as such we have to use smaller time frames. See: http://labs.elmfunds.com/pastreturns http://labs.elmfunds.com/pastreturns https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2856963 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2856963

dsacco 9y ago
Yeah, that all makes sense, thanks. I figured you were using that 3 year figure with an implicit acknowledgement that it would provide greater or lesser rigor depending on the number of trades and the holding time. Thanks for the resources as well.