As a long time reader, I wanted to see if there were any appetite for those in the industry (both AM and HF) to create a bit of a short omnibus of strategies across asset classes and when you see red flags to exit/trim positions, with the hopes there’s some more niche ones that pop up. This may be useful for others from a different asset class, or an interesting point of history (when in 10 years someone will stumble on this post and see what people were running today).
To be clear - to give some examples:
Running a value call = Picking a cyclical bottom (more industrial, high fixed cost industries)
Running a growth call = picking inflection on S curve for low market share, large TAM (tech, consumer, bio/pharma etc)
Long carry (short gamma) = short VIX, or short funding currencies / long yield currencies, basically going long anything that collects drawdown premia.
Long gamma / convexity = timing strategy, or picking inflection points at the portfolio or underlying level (anything utilising drawdown premia, or frankly could be outright discretionary calls optimised for risk/return).
Long illiquidity = collecting premia for illiquidity, basically a more precise form of short gamma position - taking small vs big cap, to market making on securities (basically betting on distribution of returns)
long liquidity = HFT to systematic strategies that require mass data and liquidity to extract value with sufficient risk control
Long duration = straight rates call based more on a view on real economy
Long credit = straight credit calls on index vs. single names vs. country level
Cross Asset arbitrage = illiquidity / short gamma here as well (a lot of mean reversion trades or “spreads” here).
As I write I think it’ll probably end up like a factor model type of thread, but I guess what I’m getting at is, while there’s a tonne written on styles and potential alpha sources, I’m trying to get a messy sense of the various patterns that emerge, hopefully across asset classes.
my own hunch is that everything boils down to a few key sources - liquidity, duration, credit, mean reversion and trend or inflection. But curious about how this looks on the ground. Why is this useful? I think a discussion could help shape views on risk management - rules of thumb around cutting positions, adding etc, which I think by and large is a skill set everyone can work on.
Based on the most helpful WSO content, discussing strategies across asset classes and identifying red flags for exiting or trimming positions is indeed a valuable conversation for professionals in both Asset Management (AM) and Hedge Funds (HF). The examples you've provided, such as running a value call, growth call, long carry, long gamma/convexity, long illiquidity, long liquidity, long duration, long credit, and cross-asset arbitrage, are insightful. These strategies highlight the importance of understanding the underlying drivers such as liquidity, duration, credit, mean reversion, and trend or inflection points.
In the context of risk management, it's crucial to have a set of rules or guidelines for when to cut or add positions. This skill set is essential for managing portfolios effectively and ensuring that investment decisions align with the overall strategy and risk tolerance of the fund or portfolio.
Here are some additional thoughts based on the WSO Dataset:
Liquidity Management: Understanding the liquidity profile of your investments is crucial. Illiquid investments might offer higher returns (liquidity premium) but can pose significant risks during market stress. Strategies like long illiquidity take advantage of this premium but require careful risk management to ensure that positions can be exited without significant loss.
Duration and Credit Analysis: For strategies like long duration and long credit, a deep understanding of the interest rate environment and credit markets is essential. These strategies often depend on macroeconomic forecasts and credit risk assessments. Monitoring economic indicators and credit spreads can provide early warning signs for potential strategy adjustments.
Mean Reversion and Trend Following: Both mean reversion and trend following strategies rely on different views of market behavior. Mean reversion strategies bet on the price returning to a historical average, while trend following strategies capitalize on the continuation of a current market trend. Identifying the right conditions for each strategy requires thorough market analysis and a keen understanding of market sentiment and fundamentals.
Cross-Asset Arbitrage: This strategy involves taking advantage of price differentials between related assets across different markets or asset classes. It requires sophisticated models to identify arbitrage opportunities and swift execution to capitalize on them before they disappear. Monitoring for market inefficiencies and staying informed about global market events are key to success in cross-asset arbitrage.
Risk Management Practices: Regardless of the strategy, effective risk management practices are fundamental. This includes setting stop-loss orders, diversifying investments across asset classes, and continuously monitoring for market changes that could affect the investment thesis. Developing a disciplined approach to risk management can help protect against significant losses and improve the overall performance of the portfolio.
In conclusion, while there are numerous strategies across asset classes, the key to success lies in a deep understanding of the market dynamics, continuous monitoring, and effective risk management. Engaging in discussions and sharing insights on forums like WSO can provide valuable perspectives and help refine these strategies.
Sources: Macro HF Interviews: Paul Tudor Jones, Louis Bacon and Bruce Kovner, https://www.wallstreetoasis.com/forum/asset-management/endowments-foundations-part-2-asset-allocation?customgpt=1, https://www.wallstreetoasis.com/forum/hedge-fund/demystify-systematic-macro?customgpt=1, In the near future, what will be the fastest growing Asset Classes and practices in the financial industry?, AM vs HF: The Business of Our Business
You seriously expect people to share their strategies? Yea, here’s my formula that made $40m last year, please don’t steal it because it’s what’s allowing me to purchase a fleet of Ferraris each year.
Yeah, I do :)
But to take your point seriously - I'm not asking for trade secrets in the 'Prop trading sense', I'm asking for example, the people who do 'value' how do they avoid value-traps, call inflections and know when to cut positions (i.e. the Portfolio management part of the strategy) - like I don't want the specifics of the positions, just the strategy / tactic / investment philosophy on how they are managed (Which PM's tend to like to talk about, actually).
To your point the thing that made $40m last year may make $50m this year, and then -$200m the following year; how do you know specifically when to exit / scale it? How are you thinking about the risk - just modelled on VaR / Vol / Drawdown / Factor limits? Discretionary rules of thumb?
What value is there to me in sharing this information with you? I don’t even want you knowing what train I take to the city or car I drive on the weekends.
“I’m not asking for your trade secrets” but… how do you do this and how do you think about that?
Common dude. Read what you wrote. You’re either intentionally pretending to be ignorant, or you’re just dumb.
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