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> Many hedge funds have been beating it for 20 years or more Relatively few, I would say, if you measure it by realised Sharpe. Rentech, Brevan Howard, D.E. Sh

> Many hedge funds have been beating it for 20 years or more Relatively few, I would say, if you measure it by realised Sharpe. Rentech, Brevan Howard, D.E. Shaw, and maybe AHL and Winton excluding the past few years. I'm struggling to name others that have done well over a sustained period. There are a lot of funds out there, and IMO much of the supposed 'outperformance' is a combination of leverage and survivor bias (I say this as a former hedge fund quant).

motohagiography 7y ago
I remember reading an Andrew Lo quote back in 2007-8 where he said something along the lines of there at the time being about 9000 hedge funds in operation at last count, and for comparison, there were about 7000 Taco Bell franchises. Given that sample size of funds, possible returns, and any distribution you want to fit into it, your odds may be better at a roulette table.
mruts 7y ago
2 Sigma and Bridgewater due pretty well for themselves Sharpe ratio-wise. Also if we're talking about market makers, Jane Street, Susquehanna, Fortress, and Citadel very well for themselves.
- soVeryTired 7y ago
  Huh. I hadn't realised that two sigma were that old. My point still stands though. Market making is a different kettle of fish in the sense that it's more of a financial service than a directional bet on markets. It's also much less capital intensive so there's less pressure to raise money from clients. As a market-maker, you can certainly find yourself on the wrong side of a trade, but generally the goal is to be as market-neutral as possible.
  - mruts 7y ago
    I mean, the goal of absolute return hedge funds is pretty much the same: only have exposure to alpha factors. With market makers it’s pretty much the same thing: only have exposure to order flow. That’s the alpha. I’ve worked as a quant at both hedge funds and market makers, and both have a similar philosophy of a only getting exposure to “alpha”, though the means and capital required (as you mentioned) are quite different. I think a concept of Sharpe ratio still applies to both though, with market making having an clearly higher one. Personally, I’ve found working for a hedge fund a lot better, market making is kind of a drab business when you get down to the nuts and bolts.

motohagiography 7y ago

I remember reading an Andrew Lo quote back in 2007-8 where he said something along the lines of there at the time being about 9000 hedge funds in operation at last count, and for comparison, there were about 7000 Taco Bell franchises. Given that sample size of funds, possible returns, and any distribution you want to fit into it, your odds may be better at a roulette table.

mruts 7y ago

2 Sigma and Bridgewater due pretty well for themselves Sharpe ratio-wise. Also if we're talking about market makers, Jane Street, Susquehanna, Fortress, and Citadel very well for themselves.

soVeryTired 7y ago
Huh. I hadn't realised that two sigma were that old. My point still stands though. Market making is a different kettle of fish in the sense that it's more of a financial service than a directional bet on markets. It's also much less capital intensive so there's less pressure to raise money from clients. As a market-maker, you can certainly find yourself on the wrong side of a trade, but generally the goal is to be as market-neutral as possible.
- mruts 7y ago
  I mean, the goal of absolute return hedge funds is pretty much the same: only have exposure to alpha factors. With market makers it’s pretty much the same thing: only have exposure to order flow. That’s the alpha. I’ve worked as a quant at both hedge funds and market makers, and both have a similar philosophy of a only getting exposure to “alpha”, though the means and capital required (as you mentioned) are quite different. I think a concept of Sharpe ratio still applies to both though, with market making having an clearly higher one. Personally, I’ve found working for a hedge fund a lot better, market making is kind of a drab business when you get down to the nuts and bolts.