5 ms·

Quantquake: 2020 and the Revenge Against the Nerds

92 points by apsec112 6y ago

neonate 6y ago
https://web.archive.org/web/20210129042958/https://rhsfinancial.com/2021/01/11/quantquake-2020-and-the-revenge-against-the-nerds/ https://web.archive.org/web/20210129042958/https://rhsfinanc...
hamilyon2 6y ago
I guess, you can't pull a good analysis of investment strategy only taking into account latest year at any point in time in history. Every year is different. If quants and value investors did poorly this year it tells exactly nothing about how will they perform the next month or year or decade.
- valvar 6y ago
  That's exactly the point that the article makes.
xondono 6y ago
You can keep driving your car looking to the rear mirror as long as the road keeps going straight, but you will be out on the first bend.
- gostsamo 6y ago
  Nobody actually knows the future so everyone else is driving not by observing the road ahead, but by looking to the side and trying to catch some glimps from the corner of their eye.
z3t4 6y ago
One reason for sharp dip is people trying to make a profit by selling when its going down and then buying when it has reached bottom or going up. So i guess quantum is bad at predicting human factor, which is the biggest factor, and to be fair - mostly random.
- dualthro 6y ago
  I believe the sharp dip was a "short ladder" as they call it -- hedge funds selling the stock to eachother at low prices to attempt to lower the stock price and trigger some retail investors' stop orders to trigger and free up some shares for cheap. https://twitter.com/justinkan/status/1354861574163320833/photo/1 https://twitter.com/justinkan/status/1354861574163320833/pho...
  - hntrader 6y ago
    This is a conspiracy theory spread on social media. Shorting after it has dropped so much already is an unprofitable strategy. These are cascading liquidations and the valid strategy is to go long when the liquidations stop and you get a relief bounce that squeezes out the novice shorts who chased the move. People have different names for the strategy (wall drop long, parabolic long). Shorts are mostly covering (not initiating) during the drop. The only sophisticated traders adding to a short would be options dealers who need to gamma hedge, or delta one HFTs trying to capture a quick move based on short term order flow imbalance.
    - Armisael16 6y ago
      I think you may need to reread the tweet. He isn’t saying they shorted during the drop; he’s saying they shorted just before they initiated the drop. It’s obviously profitable to short a stock when you know the value is going to tank in half an hour.
      - hntrader 6y ago
        The tweet is fine and I'm sure many hedge funds and prop firms shorted the initial catalyst. What I'm referring to is the "short ladder" hypothesis mentioned in the parent post which was originally spread on WSB that Justin didn't refer to in the tweet.
jorpal 6y ago
Revenge against the finance nerds. If the finance nerds bought companies made by tech nerds they’d be fine.
- pishpash 6y ago
  Aren't finance nerds the same as tech nerds these days?
lordnacho 6y ago
I ran quant funds. As a quant, you are going to be long history and short novelty. I think a massive pandemic plus massive financial stimulus qualifies as novelty. The more history, the more confident you are that things will correct, but also the more history the more exposed you are to a regime change. Think of it like hypothesis testing, if evidence builds up over time it will take more evidence to change the test. Having said that, timescale is relevant too. The kinds of strategies mentioned are somewhat long term buy-and-holds of certain kinds of portfolio, which require time to play out, and which have the attention of ordinary investors. If you were looking at very short term strategies like what an HFT might look at, the evidence builds up super fast in comparison. The other big issue is you tend to look at whatever patterns you find that are repeated, but you don't know why. The sort of thoughts that lead you to buy techs during the pandemic come from some kind of idea about dynamics, which are not so easy to prove.
- FeepingCreature 6y ago
  A stock market question. Looking at the outcomes - high-volatility stocks are up, safe stocks are down - makes me suspect this is a "risk bubble". When watching AlphaGo play Go, you can tell when the network thinks it is ahead or behind. When it is ahead, it will attempt to reduce uncertainty in its evaluation, seeking outcomes where it certainly doesn't lose. When it is behind however, it will attempt to increase uncertainty in its evaluation, seeking outcomes where it doesn't certainly lose. Looking at the market makes me suspect something similar is at play, where the market "should" go down but a lot of investment money is chasing opportunities that "don't certainly lose." In that sense the march drop would be two sequential realizations: "we need to get out of stocks" and "everything else is also fucked", driving investors back into stocks due to a lack of somewhere else to go. Does that sound plausible?
  - HenryBemis 6y ago
    > "we need to get out of stocks" and "everything else is also fucked", driving investors back into stocks due to a lack of somewhere else to go layman's perspective here: well.. people with money want to invest it somehow, somewhere to increase it. -It is stock. The stock prices go up and (e.g.) gold price goes down. -Then some think "ooh gold is so cheap", and cash out their profits from stocks, and drop that money to gold. Stocks go down, gold goes up. -Then some think "ooh stocks are so cheap", and cash out their profits from gold, and drop that money to stocks. Gold goes down, stocks go up. -ad infinitum.. Now then.. the big players that move the marker, position themselves early on and ride the full wave. The semi-smart catch part of that wave 'up'. The little fish/retail/impatient tend to buy the stock/gold on its peak, and is paying for the exit-ers profit-cash-out. And then they either cut their losses, or they wait for 1-2-5 years for the next 'peak' to sell to someone else (I know I am oversimplifying it - apologies). Where stocks, gold please replace with stock[A..Z], bond[A..Z], index[A..Z], commodity[A..Z] and so on..
everybodyknows 6y ago
To a nerd of a generalist science+engineering variety who occasionally short-sells individual stocks, this analysis feels heartening. Consider: > quants often rely on measures of valuation, volatility, or momentum to guide their process, based on the historical success of these metrics in predicting returns, and in nearly every case following the numbers led investors astray in 2020, starting with perhaps the most time-tested of financial strategies, value investing. So, there are volume holders who did not even consider selling when the Diamond Princess news began to trickle out. Or a few years back, stayed in VW even as technical details of the crude engine controller gaming emerged, making it plain to any hacker how very culpable the company was.

92 points by apsec112 6y ago

https://web.archive.org/web/20210129042958/https://rhsfinancial.com/2021/01/11/quantquake-2020-and-the-revenge-against-the-nerds/ https://web.archive.org/web/20210129042958/https://rhsfinanc...

hamilyon2 6y ago

I guess, you can't pull a good analysis of investment strategy only taking into account latest year at any point in time in history. Every year is different. If quants and value investors did poorly this year it tells exactly nothing about how will they perform the next month or year or decade.

valvar 6y ago
That's exactly the point that the article makes.

xondono 6y ago

You can keep driving your car looking to the rear mirror as long as the road keeps going straight, but you will be out on the first bend.

gostsamo 6y ago
Nobody actually knows the future so everyone else is driving not by observing the road ahead, but by looking to the side and trying to catch some glimps from the corner of their eye.

z3t4 6y ago

One reason for sharp dip is people trying to make a profit by selling when its going down and then buying when it has reached bottom or going up. So i guess quantum is bad at predicting human factor, which is the biggest factor, and to be fair - mostly random.

dualthro 6y ago
I believe the sharp dip was a "short ladder" as they call it -- hedge funds selling the stock to eachother at low prices to attempt to lower the stock price and trigger some retail investors' stop orders to trigger and free up some shares for cheap. https://twitter.com/justinkan/status/1354861574163320833/photo/1 https://twitter.com/justinkan/status/1354861574163320833/pho...
- hntrader 6y ago
  This is a conspiracy theory spread on social media. Shorting after it has dropped so much already is an unprofitable strategy. These are cascading liquidations and the valid strategy is to go long when the liquidations stop and you get a relief bounce that squeezes out the novice shorts who chased the move. People have different names for the strategy (wall drop long, parabolic long). Shorts are mostly covering (not initiating) during the drop. The only sophisticated traders adding to a short would be options dealers who need to gamma hedge, or delta one HFTs trying to capture a quick move based on short term order flow imbalance.
  - Armisael16 6y ago
    I think you may need to reread the tweet. He isn’t saying they shorted during the drop; he’s saying they shorted just before they initiated the drop. It’s obviously profitable to short a stock when you know the value is going to tank in half an hour.
    - hntrader 6y ago
      The tweet is fine and I'm sure many hedge funds and prop firms shorted the initial catalyst. What I'm referring to is the "short ladder" hypothesis mentioned in the parent post which was originally spread on WSB that Justin didn't refer to in the tweet.

jorpal 6y ago

Revenge against the finance nerds. If the finance nerds bought companies made by tech nerds they’d be fine.

pishpash 6y ago
Aren't finance nerds the same as tech nerds these days?

lordnacho 6y ago

I ran quant funds. As a quant, you are going to be long history and short novelty. I think a massive pandemic plus massive financial stimulus qualifies as novelty. The more history, the more confident you are that things will correct, but also the more history the more exposed you are to a regime change. Think of it like hypothesis testing, if evidence builds up over time it will take more evidence to change the test. Having said that, timescale is relevant too. The kinds of strategies mentioned are somewhat long term buy-and-holds of certain kinds of portfolio, which require time to play out, and which have the attention of ordinary investors. If you were looking at very short term strategies like what an HFT might look at, the evidence builds up super fast in comparison. The other big issue is you tend to look at whatever patterns you find that are repeated, but you don't know why. The sort of thoughts that lead you to buy techs during the pandemic come from some kind of idea about dynamics, which are not so easy to prove.

FeepingCreature 6y ago
A stock market question. Looking at the outcomes - high-volatility stocks are up, safe stocks are down - makes me suspect this is a "risk bubble". When watching AlphaGo play Go, you can tell when the network thinks it is ahead or behind. When it is ahead, it will attempt to reduce uncertainty in its evaluation, seeking outcomes where it certainly doesn't lose. When it is behind however, it will attempt to increase uncertainty in its evaluation, seeking outcomes where it doesn't certainly lose. Looking at the market makes me suspect something similar is at play, where the market "should" go down but a lot of investment money is chasing opportunities that "don't certainly lose." In that sense the march drop would be two sequential realizations: "we need to get out of stocks" and "everything else is also fucked", driving investors back into stocks due to a lack of somewhere else to go. Does that sound plausible?
- HenryBemis 6y ago
  > "we need to get out of stocks" and "everything else is also fucked", driving investors back into stocks due to a lack of somewhere else to go layman's perspective here: well.. people with money want to invest it somehow, somewhere to increase it. -It is stock. The stock prices go up and (e.g.) gold price goes down. -Then some think "ooh gold is so cheap", and cash out their profits from stocks, and drop that money to gold. Stocks go down, gold goes up. -Then some think "ooh stocks are so cheap", and cash out their profits from gold, and drop that money to stocks. Gold goes down, stocks go up. -ad infinitum.. Now then.. the big players that move the marker, position themselves early on and ride the full wave. The semi-smart catch part of that wave 'up'. The little fish/retail/impatient tend to buy the stock/gold on its peak, and is paying for the exit-ers profit-cash-out. And then they either cut their losses, or they wait for 1-2-5 years for the next 'peak' to sell to someone else (I know I am oversimplifying it - apologies). Where stocks, gold please replace with stock[A..Z], bond[A..Z], index[A..Z], commodity[A..Z] and so on..

everybodyknows 6y ago

To a nerd of a generalist science+engineering variety who occasionally short-sells individual stocks, this analysis feels heartening. Consider: > quants often rely on measures of valuation, volatility, or momentum to guide their process, based on the historical success of these metrics in predicting returns, and in nearly every case following the numbers led investors astray in 2020, starting with perhaps the most time-tested of financial strategies, value investing. So, there are volume holders who did not even consider selling when the Diamond Princess news began to trickle out. Or a few years back, stayed in VW even as technical details of the crude engine controller gaming emerged, making it plain to any hacker how very culpable the company was.