Surviving the Bear market
To all the peers in HF space,
How are you dealing with current market condition? What strategy you're using and what's your view on this year PnL + industry performance? Also any major change in your professional lives?
This market is quite unforgiving tbh, but also quite intellectually challenging. I run a small book and unrestricted mandate, so quite nimble tbh, but working hours are ramping up, very little time away from desk since Jan.
Luckily, I dont suffer heavy loss (for now!) like all the other big guys are experiencing but feel like there will be a lot of funds getting blown up this year.
I was very junior during recent turmoils in Volmageddon 18 and Covid crash 20, but this time I will have more responsibility regarding the fate of the fund. Any advice from veterans who survived past bear markets / crashes? Keen to hear.
The main piece of advice I'd give to traders out there is to truly understand your process, why the market should compensate you for your strategy, and under what conditions (e.g. types of market irrationality) your strategy will fail. Too many traders do not critically think about these things, they just assume that they are smarter than everyone else or have some type of unique foresight (breaking news you don't).
If you are able to consistently make money in the markets, you are by definition being compensated for some risk or liquidity premium. Understand what that is and you can weather the storm. Don't understand it and you are simply gambling.
Very well written post. One point I'd add: do not confuse overfitting for adjusting to the current market.
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That's interesting because volatility is mean-reverting and has historically been over-priced.
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you still need to time & structure a long vol strategy thought, there are times since last couple of months when market tanks and VIX/VXV drops as well.
you stll suffer loss if you dont know how to long vol.
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On the FICC/Macro side of things. This volatility is next level and my entire workout schedule is out of whack. While we have done well keeping up and dealing with it is quite daunting. Nothing is worse than being right and not having the right size on cause the volatility is unforgiving.
Just understand times like this is why we do this career, career not a 3 year bull run. All these people who shit on HF people on here cause they crushed on TSLA etc are getting harsh lessons, and someone like you has to deal with that to. Learning and growing through these market cycles is the ultimate intellectual challenge. So while your process is sound the noise out there is going to make it difficult and you really have to keep to your beliefs and rules.
The education you getting here is irreplaceable you just need to keep surviving and learning. That way once this cycle passes or calms down you will be prepared to crush again.
It's kind of funny because I'm usually in the school of value investing and stuck to it for a very long time. I started to loosen on that a bit in 2020, after seeing how quickly the market rebounded to madness after the Fed came in to save the day during the pandemic, and started to buy higher volatility stocks/wheel options on these companies that paid a high premium. Since we had a solid bull run after the Fed intervention, I was starting to think that maybe that last decade, I was wrong and that maybe I did miss a paradigm shift.
Well, it turns out I was right and that valuations DO matter in the long-run. Thankfully, I only put a very small amount of money into these growth names, but it's still a painful reminder of how important it is to stick to your principles. The biggest takeaways I've learned from my roughly 10-15 years investing is:
1. It's very hard to beat the market and it's even harder to time the market. Consistently investing in diversified funds, regardless of whether the market is "high" or "low" will keep me on a solid foundation to building long-term wealth
2. Markets can be wonky for a very, very, very long time (in my case ~10 years!), but you have to stick to your plan because they can also reverse course in a relative heart beat (5 months in this case).
I like your mention of the premiums and wheels. I manage my own money, so its nowhere near the scale some of you guys do, but my only strategy is to write options. There have indeed been some crazy premiums available out there. It's kind of fun to ride that wave of sentiment that can drive some of those premiums and put them out of whack and attempt to capture some of them. So, while I am flat for the year (and I'm pretty active in my writing- I am managing 40-ish spreads at any given time) I'm still doing better than the clowns that run my 401k ;)
I can't wait for these dumbass meme stock clowns that thought they could do no wrong last year get cock slapped even harder across the face by Mr. Market over the next few months
Well that should have already happened since some of them (in theory) had some massive tax bills to deal with last month, no??? You can't tell me those bros were prepared for that portion of it. But yet I don't see many stories coming out along those lines.
One of the major issues I see with the purely bottom-up fundamental long-short strategy is the lack of contingent strategies when large macro, highly correlated sell-offs occur. You're getting paid to pick stocks, not make macro calls.
The first few sell-offs are dampened, but timing the bottom is extremely difficult, which leaves a lot of HFs exposed when indices drop sequentially after a continuous series of macro moves.
Net exposure should be controlled at all times, yes, but your short idea just runs out in these market crashes, where you're forced to cover most shorts. Gross is naturally down, but again, you've just covered 75% of your shorts and are largely exposed on the long side. The next market move down will hurt. Adding to Shorts also poses risk if the market rebounds hard. The short-term drawdown is there, now the key question now is on the next bounce what's the best course of action? Managing that short-side in these market conditions is tricky.
It's been all directional, macro calls this year. 2022 is that year, where all volatility has been macro-driven.
Having well fleshed out ideas at all times handy for these extreme situations just doesn't fit the investment process for a lot of fundamental funds that go balls deep and nerd out on research.
But hey, let's see who comes out winners when the market recovers.
Fundamental single-manager funds will have this issue. Fundamental pods at MMs also have this issue. MM's across the entire fund, are well mixed as macro strats outperform to offset fundamental books.
Lastly, the most skilled and experienced managers can also add a layer of macro hedges in times like this, which is a completely different skill-set.
To echo what was said before, the investment process is continually being updated and the ability to learn from mistakes is vital.
This is exactly why funds should play in a market/factor neutral space. These bottoms up fundamental guys functionally got paid 2/20 to be long beta/growth, and now get to keep the fees while giving back all of their gains via beta/growth.
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Managing just my personal account, but personal think that this is a great time to run long short if you have flexible mandate and guts.
Am up 30+% ytd with 3 Sharpe running 100-200% gross and 10-30% net. Lots of index shorts, some tactical stuff(twtr, song, nflx earnings), balanced with overweight commodity and value longs.
People who complain the most are those who haven't realised that their deep diligence, 20 page memos were in fact sector, momentum and low interest rate bets. Have taken last week to rotate back into undervalued growth stuff.
That said, I've been very lucky so far, but my viewpoint is that there's always a bull market somewhere.
If its your own money, you can have speed and flexibility beyond any institution. Take advantage of it!
Right, so a directional long/short.
Imagine an LP investing in a longer-term fundamental long/short see a book turnover 200% a year when the markets are volatile.
Some funds are just trapped within mandates. Or, they were just so successful for such a long time, why change?
Agree on the deep diligence etc. But it worked for what, 10-years until it didn't? That's a lot of capital compounded and performance fees collected.
The other thread on Tiger Global mentions why didn't they do an interest rate and inflation hedge, given how much tech valuations are based on low-risk free rates in the DCF capturing the majority of the terminal value. Come on, that's finance 101 in under grad right?
I reckon they just didn't know how to do it or never bothered to learn because they were trapped within their own investment framework.
Times like these, am pleased that I work at a market neutral pod where I can trade in and out much quicker instead of pretending to hold on to long term conviction trades. Sold my growth shit long ago and switched into defensives to survive this market. This long term investing idea just doesn’t work. Look at Ackman’s Netflix trade. Long term turned short term so quick
correct, in and out quickly, scalping on short term rotations without digging too deep into fundamental works out much better than 'high conviction' atm. Well, unless those high conviction were short high beta / risk / growth / tech.
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