6 ms·

It's my opinion that any active trader (of which hedge fund is a subset) that consistently beats the market is engaged in some form of insider trading.

deleted 12y ago
[deleted]
Mikeb85 12y ago
And that would be a very uninformed opinion. Think of it like this: traders and everyone in the finance business devotes their entire working life and career to figuring out how to trade. Programmers spend time learning, creating side projects on Github, poking through open source projects, working on projects at work, etc... In the decades that span a normal career, that's a lot of code and a lot of learning that a programmer accumulates, which is why they're able to create nice things. Traders are the finance equivalent of all that knowledge (the good ones anyway). You don't think that after so much experience, it might be possible that a trader can make money in the market without cheating? The traders that do cheat though, do so because of greed, not because it's impossible to make money...
- bo1024 12y ago
  Not a fair comparison. Programming isn't a pure competition. If you do better in programming, this does not imply that every other programmer in the world must be doing worse. In the market, the more money you make, the less everyone else can make. Of course, it's possible for all the traders to make money as long as the total market continues to grow... that's a pyramid scheme in my book.... I'm not agreeing with the parent post, because I think probability dictates that some trader will beat the market consistently (for a while). But that doesn't necessarily demonstrate "skill".
  - Mikeb85 12y ago
    You forget how much money goes back into the market through dividends and buybacks. Its a very significant number. Right now the dividend yield of the S&P 500 is 1.90% (nearly a historic low) so it seems insignificant, but in past years the dividend yield has been nearly as much as the price increase of the overall market...
  - SamReidHughes 12y ago
    > In the market, the more money you make, the less everyone else can make. That's just not true. When you're trading with somebody, that's because you're offering a marginally better deal than somebody else was offering. Trading activity ends up affecting decisions on what to produce.
fiatmoney 12y ago
There's a difference between having non-public information and insider trading.
- harmegido 12y ago
  You're right. I'll agree with that and should have said "non-public information."
  - deleted 12y ago
    [deleted]
- leroy_masochist 12y ago
  Yes.
leroy_masochist 12y ago
I'd agree with you to a large extent; a better, more precise way to put it would be to say that long/short equity hedge funds have to be engaged in de facto insider trading* in order to consistently generate enough alpha to attract investors. It's just too hard to consistently be smarter than the market on both your long and short bets, especially when it's a larger cap stock whose float has constant inflows and outflows of institutional capital. That said, there are other asset classes which, ipso facto, do not lend themselves to insider trading, such as commodities and distressed debt. And there are definitely many traders in these spaces who consistently post outsized returns, which is why they get paid so much. * I include in this definition not just stuff that will get you sent to jail, such as solicitation of MNPI from company employees, but also the more gray-area tactics commonly used by long/short analysts. Chief among these is speaking to "industry consultants" who give traders their "personal perspective" on certain companies, which in other words means paying them to relay the gossip they hear from their loose-lipped friends who work at various publicly traded companies.
- PhantomGremlin 12y ago
  > long/short equity hedge funds have to be engaged in de facto insider trading* in order to consistently generate enough alpha to attract investors You're probably right. Especially considering how big the fees were. Stevie's firm took 3% of assets for expenses plus 50% of the profits.[1] That's a very high hurdle. The standard hedge fund fee is 2%/20% and even that is high enough that many funds don't beat the S&P (or whatever they're using as a benchmark) after fees and expenses. BTW, Bess Levin at the site I linked to below is great for irreverent and snarky comments about Wall Street. [1] http://dealbreaker.com/2011/02/absurd-speculation-that-sac-capital-might-lower-its-fees-on-account-of-investor-demand-can-be-nipped-in-the-bud-right-now/ http://dealbreaker.com/2011/02/absurd-speculation-that-sac-c...
- bdkoepke 12y ago
  We had a manager at BP come and present at my University a few years ago on commodity trading. When he as discussing how BP consistently outperformed the market he didn't call it insider trading directly. If I recall his words were "BP leverages our superior market knowledge to outperform the market". In other words they had significant non-public information due to the fact that BP owns a significant amount of the commodities market. Supposedly the trading branch works at arms reach, but they still have access to production information that isn't available to the public... One of my favourite university professors invited him to come and speak after the BP Canada Trading Competition: http://people.ucalgary.ca/~sick http://people.ucalgary.ca/~sick, http://haskayne.ucalgary.ca/bp-canada-trading-competition-details http://haskayne.ucalgary.ca/bp-canada-trading-competition-de...
artsrc 12y ago
It seems to me that all you need to gain above average return is to identify someone who will accept below average returns. For a long time US shares that paid high dividends were disadvantaged from a tax perspective compared to those that paid low dividends. So if you are a zero tax entity (retirement fund) you could reasonably consistently outperform by selecting those companies which pay high dividends. I work for a company where we are first banned from trading for a period, then given shares, which we must then sell over a certain period to get a particular tax treatment. We always feel that the shares trade lower over the period we must sell. And higher when we can't sell. These are all fairly public, and I think just the tip of the iceberg.
- vvvv 12y ago
  Many of you selling over the same period would create a downward pressure on price.
  - wastedhours 12y ago
    Assumedly these periods are also public, and thus buyers know they can lowball the price to get the transaction done?
lordnacho 12y ago
I can certainly see how one might think that, given this case. But having looked at some consistently profitable strategies, I am quite convinced that there are people with real, legal edge in the market. You wouldn't believe some of the things people exploit, they can very very small things. I remember interviewing a guy whose whole thing was to make electronic markets in a product at the price where the price increments changed (think 8-9->10<-12-14). I didn't pursue it. Yet another guy found a small quirk in a niche market related to baskets of securities. Quite often they are things that have a cap on the money that can be extracted. A friend of a friend has an obscure electronic strategy that makes him a few million bucks a year, but can't be sized. Then there is also a whole class of people with some sort of information privilege. Market makers who hear about a big order first (because their broker has got to call somebody first), or participants who are at a natural information aggregation point (people with a lot of connections). In the HFT space, there's also a whole load of things related to reg NMS rules that ordinary participants are possibly not aware of.
cmdkeen 12y ago
Simply not true - there are plenty of areas where consistently good returns are generated, however they aren't the best and they aren't too consistent. The first hedge funds were successful because there was little competition, they could conduct things like arbitrage because no-one else was. The problem is that such strategies don't work generally with scale, and there is so much money in hedge funds that they can't all conduct such activity profitably and thus the opportunity is overcrowded. Some active traders maintain their advantage by having such a high built in advantage that they have effectively monopolised a specific area, often through using technology and data mining. They are happy to sit on their strategy and keep reinforcing it to keep that advantage. Finally there is the successful strategy of actually investing in companies over the long hall. Hedge funds don't do this, people like Warren Buffet do. Surprisingly few companies, even pension investors, properly do this (riding through bad patches without firing the investors for instance) and thus there isn't nearly as much competition as you would think - very few companies genuinely invest over a 10 year time frame for instance.

deleted 12y ago

[deleted]

Mikeb85 12y ago

And that would be a very uninformed opinion. Think of it like this: traders and everyone in the finance business devotes their entire working life and career to figuring out how to trade. Programmers spend time learning, creating side projects on Github, poking through open source projects, working on projects at work, etc... In the decades that span a normal career, that's a lot of code and a lot of learning that a programmer accumulates, which is why they're able to create nice things. Traders are the finance equivalent of all that knowledge (the good ones anyway). You don't think that after so much experience, it might be possible that a trader can make money in the market without cheating? The traders that do cheat though, do so because of greed, not because it's impossible to make money...

bo1024 12y ago
Not a fair comparison. Programming isn't a pure competition. If you do better in programming, this does not imply that every other programmer in the world must be doing worse. In the market, the more money you make, the less everyone else can make. Of course, it's possible for all the traders to make money as long as the total market continues to grow... that's a pyramid scheme in my book.... I'm not agreeing with the parent post, because I think probability dictates that some trader will beat the market consistently (for a while). But that doesn't necessarily demonstrate "skill".
- Mikeb85 12y ago
  You forget how much money goes back into the market through dividends and buybacks. Its a very significant number. Right now the dividend yield of the S&P 500 is 1.90% (nearly a historic low) so it seems insignificant, but in past years the dividend yield has been nearly as much as the price increase of the overall market...
- SamReidHughes 12y ago
  > In the market, the more money you make, the less everyone else can make. That's just not true. When you're trading with somebody, that's because you're offering a marginally better deal than somebody else was offering. Trading activity ends up affecting decisions on what to produce.

fiatmoney 12y ago

There's a difference between having non-public information and insider trading.

harmegido 12y ago
You're right. I'll agree with that and should have said "non-public information."
- deleted 12y ago
  [deleted]
leroy_masochist 12y ago
Yes.

leroy_masochist 12y ago

I'd agree with you to a large extent; a better, more precise way to put it would be to say that long/short equity hedge funds have to be engaged in de facto insider trading* in order to consistently generate enough alpha to attract investors. It's just too hard to consistently be smarter than the market on both your long and short bets, especially when it's a larger cap stock whose float has constant inflows and outflows of institutional capital. That said, there are other asset classes which, ipso facto, do not lend themselves to insider trading, such as commodities and distressed debt. And there are definitely many traders in these spaces who consistently post outsized returns, which is why they get paid so much. * I include in this definition not just stuff that will get you sent to jail, such as solicitation of MNPI from company employees, but also the more gray-area tactics commonly used by long/short analysts. Chief among these is speaking to "industry consultants" who give traders their "personal perspective" on certain companies, which in other words means paying them to relay the gossip they hear from their loose-lipped friends who work at various publicly traded companies.

PhantomGremlin 12y ago
> long/short equity hedge funds have to be engaged in de facto insider trading* in order to consistently generate enough alpha to attract investors You're probably right. Especially considering how big the fees were. Stevie's firm took 3% of assets for expenses plus 50% of the profits.[1] That's a very high hurdle. The standard hedge fund fee is 2%/20% and even that is high enough that many funds don't beat the S&P (or whatever they're using as a benchmark) after fees and expenses. BTW, Bess Levin at the site I linked to below is great for irreverent and snarky comments about Wall Street. [1] http://dealbreaker.com/2011/02/absurd-speculation-that-sac-capital-might-lower-its-fees-on-account-of-investor-demand-can-be-nipped-in-the-bud-right-now/ http://dealbreaker.com/2011/02/absurd-speculation-that-sac-c...
bdkoepke 12y ago
We had a manager at BP come and present at my University a few years ago on commodity trading. When he as discussing how BP consistently outperformed the market he didn't call it insider trading directly. If I recall his words were "BP leverages our superior market knowledge to outperform the market". In other words they had significant non-public information due to the fact that BP owns a significant amount of the commodities market. Supposedly the trading branch works at arms reach, but they still have access to production information that isn't available to the public... One of my favourite university professors invited him to come and speak after the BP Canada Trading Competition: http://people.ucalgary.ca/~sick http://people.ucalgary.ca/~sick, http://haskayne.ucalgary.ca/bp-canada-trading-competition-details http://haskayne.ucalgary.ca/bp-canada-trading-competition-de...

artsrc 12y ago

It seems to me that all you need to gain above average return is to identify someone who will accept below average returns. For a long time US shares that paid high dividends were disadvantaged from a tax perspective compared to those that paid low dividends. So if you are a zero tax entity (retirement fund) you could reasonably consistently outperform by selecting those companies which pay high dividends. I work for a company where we are first banned from trading for a period, then given shares, which we must then sell over a certain period to get a particular tax treatment. We always feel that the shares trade lower over the period we must sell. And higher when we can't sell. These are all fairly public, and I think just the tip of the iceberg.

vvvv 12y ago
Many of you selling over the same period would create a downward pressure on price.
- wastedhours 12y ago
  Assumedly these periods are also public, and thus buyers know they can lowball the price to get the transaction done?

lordnacho 12y ago

I can certainly see how one might think that, given this case. But having looked at some consistently profitable strategies, I am quite convinced that there are people with real, legal edge in the market. You wouldn't believe some of the things people exploit, they can very very small things. I remember interviewing a guy whose whole thing was to make electronic markets in a product at the price where the price increments changed (think 8-9->10<-12-14). I didn't pursue it. Yet another guy found a small quirk in a niche market related to baskets of securities. Quite often they are things that have a cap on the money that can be extracted. A friend of a friend has an obscure electronic strategy that makes him a few million bucks a year, but can't be sized. Then there is also a whole class of people with some sort of information privilege. Market makers who hear about a big order first (because their broker has got to call somebody first), or participants who are at a natural information aggregation point (people with a lot of connections). In the HFT space, there's also a whole load of things related to reg NMS rules that ordinary participants are possibly not aware of.

cmdkeen 12y ago

Simply not true - there are plenty of areas where consistently good returns are generated, however they aren't the best and they aren't too consistent. The first hedge funds were successful because there was little competition, they could conduct things like arbitrage because no-one else was. The problem is that such strategies don't work generally with scale, and there is so much money in hedge funds that they can't all conduct such activity profitably and thus the opportunity is overcrowded. Some active traders maintain their advantage by having such a high built in advantage that they have effectively monopolised a specific area, often through using technology and data mining. They are happy to sit on their strategy and keep reinforcing it to keep that advantage. Finally there is the successful strategy of actually investing in companies over the long hall. Hedge funds don't do this, people like Warren Buffet do. Surprisingly few companies, even pension investors, properly do this (riding through bad patches without firing the investors for instance) and thus there isn't nearly as much competition as you would think - very few companies genuinely invest over a 10 year time frame for instance.