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itsMuck
Dyn-o-mite!


Joined: 15 Mar 2007
Posts: 219

How To Speak "hedgie"
PostPosted: Wed Aug 15, 2007 10:26 pm Reply with quoteBack to top

http://www.slate.com/id/2172224/
Quote:
Hedge-Fund Phrase: Unprecedented, unique circumstances
Translation: Stuff happens. But we had no clue.


Anyone who read the best seller The Black Swan knows that random geopolitical, financial, and economic events can cause the prices of assets to move in ways that defy history and sophisticated computer models. But it comes as a shock to the brightest minds on Wall Street, especially those who run quantitative-based funds. "Wednesday is the type of day people will remember in quant-land for a very long time," Matthew Rothman, head of quantitative equity strategies for Lehman Brothers told the Wall Street Journal last week. "Events that models only predicted would happen once in 10,000 years happened every day for three days." Strangely, these same models failed to predict the once-in-10,000-year events that roiled the markets in 1997, 1998, 2001, and 2002.
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RichardCWilson
Dud?


Joined: 08 Feb 2008
Posts: 20
Location: Cambridge, MA

RE: good point
PostPosted: Fri Feb 15, 2008 2:47 pm Reply with quoteBack to top

It is true, markets move in new ways that can't always be predicted. I recently sat in on a hedge fund manager pitch by a private equity firm trying to make their foray into the space. I cringed at listening to them confidently say that while they have no real performance yet the backtesting of their quantiative models shows that they should be able to return 40-50% every year...it just isn't true and anyone who has been around the block more than 1/2 a time would AT LEAST want to do some serious homework before moving forward with a black box group that is relying solely on backtesting and a few feathers in a trader's hat.

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Aaron
A-Bomb


Joined: 24 Jan 2007
Posts: 824
Location: Atlanta, GA

Re: How To Speak "hedgie"
PostPosted: Thu Apr 03, 2008 7:01 pm Reply with quoteBack to top

Backtesting should come with a warning label. It amazes me how many otherwise intelligent people don't seem to realize that once you execute a strategy in the market, it changes the market. The observer is not separate from the subject.

Further, once a strategy is discovered, it spreads, eventually pricing itself out. Even if you think you've had perfect skill in keeping your strategy under wraps, you probably aren't the only person who thought of it. We all get to the next level by standing on the shoulders of the same giants...
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angryvoodoo
Demolition Man


Joined: 20 Nov 2007
Posts: 2110
Location: ny

Re: How To Speak "hedgie"
PostPosted: Tue Apr 08, 2008 3:07 pm Reply with quoteBack to top

model shmodel 40-50% where do i sign

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Lakshmi
Cherry Bomb


Joined: 12 Dec 2007
Posts: 195
Location: Coral Gables, Fl

Re: How To Speak "hedgie"
PostPosted: Thu May 08, 2008 4:02 am Reply with quoteBack to top

Aaron

Quote:
Backtesting should come with a warning label. It amazes me how many otherwise intelligent people don't seem to realize that once you execute a strategy in the market, it changes the market. The observer is not separate from the subject.


The problem with the quantitative approach is that you can run a backtest to find positive and negative correlations across equities, fixed income, and commodities, go long or short depending on the correlation coefficient and juice your alpha with leverage (convergence trades). However, these time series happen only once, and you have no assurances that the correlations will hold going forward.

You can always build a hypothesis regressing empirical data, in the long run it has no predictive power because you have not established a model of how these asset prices change over time and how the input weights for asset prices change over time.

There will be a variable with no correlation in your model that will correlate precisely at the wrong time, like selling off liquid assets to cover a margin call on illiquid assets last summer. Or your bid asked spreads widen beyond what was modeled, to where you now lost money on the trade because that asset has become illiquid (Long Term Capital Management).

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themaskedappraiser
Nitroglycerin


Joined: 17 Oct 2007
Posts: 801

Re: How To Speak "hedgie"
PostPosted: Fri May 09, 2008 12:18 am Reply with quoteBack to top

Lakshmi wrote:
Aaron

Quote:
Backtesting should come with a warning label. It amazes me how many otherwise intelligent people don't seem to realize that once you execute a strategy in the market, it changes the market. The observer is not separate from the subject.


The problem with the quantitative approach is that you can run a backtest to find positive and negative correlations across equities, fixed income, and commodities, go long or short depending on the correlation coefficient and juice your alpha with leverage (convergence trades). However, these time series happen only once, and you have no assurances that the correlations will hold going forward.

You can always build a hypothesis regressing empirical data, in the long run it has no predictive power because you have not established a model of how these asset prices change over time and how the input weights for asset prices change over time.

There will be a variable with no correlation in your model that will correlate precisely at the wrong time, like selling off liquid assets to cover a margin call on illiquid assets last summer. Or your bid asked spreads widen beyond what was modeled, to where you now lost money on the trade because that asset has become illiquid (Long Term Capital Management).


In other words bull***t baffles brains occasionally? Or rather, models can not and will not predict radical functions.
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RichardCWilson
Dud?


Joined: 08 Feb 2008
Posts: 20
Location: Cambridge, MA

Another article
PostPosted: Tue Jul 22, 2008 12:11 am Reply with quoteBack to top

There was another article just today in the WSJ about how many instruments that used to move in tandem are now playing their own tune. I wouldn't be shocked if a few more quant funds get hurt this next quarter.

R

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Aaron
A-Bomb


Joined: 24 Jan 2007
Posts: 824
Location: Atlanta, GA

Re: How To Speak "hedgie"
PostPosted: Tue Jul 22, 2008 12:15 am Reply with quoteBack to top

So much for correlation being core to a risk analysis!!!
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