Do you think many funds have a repeatable value adding process?
(Probably ignoring any market neutral outfits for this, my intuition tells me any returns they generate are much more statistically significant, but could be wrong)
Consider John Paulson...he and his team made a fantastic set of discoveries that led to their trading in the run up to the crisis, but AFAIK his performance hasn’t been particularly impressive since.
Back then, they happened to be looking in the right place. Is it really possible to distribute your information processing resources (analysts) in such a manner that you consistently chance upon the right place?
There are definitely firms which have a strong track record over a decent period of time, but are there really more than you’d expect from just survivorship bias? Given the thousands of funds that have been started over the decades you’d surely expect some to do very well over time purely by chance even if all of them were constructing portfolios completely randomly.
I’m interested in the industry but also quite skeptical, hoping any professionals could shed some light. (Sorry about another student-y question)
No, very few firms have a repeatable value adding process. An exception would be the multi manager places, there is a reason those type of funds are the only ones seeing capital inflows. However, 80% of the people who get a job there do not have a consistent value adding process. This is because 80% of them are pretty much just taking educated guesses with their complex financial models and have the misconception that more work = better performance .
Pods in multimanagers are market neutral right?
Interesting you mention complex financial models. Do you think quants have no place as PMs in that environment?
Can u pls stop trying to act like you understand what people actually do at any of these funds, you are in high school for gods sake...
God damn it guess I’m not going to see a particularly insightful response about the viability of quant run pods if they’re in high school 😂 do you have any thoughts on the matter?
I work at a large MM. Most quant PMs do not have any sort of edge or repeatable process. There are just as many if not more snake oil salesmen in quant as discretionary. People making hiring decisions at MM heavily value pedigree instead of skill when it comes to hiring quant PMs. If you can bullshit some stuff about machine learning or economic theory and have a PhD, you can probably finagle a job, even if you suck at coding and don’t know the difference between crude and Brent. You’ll get a year or more to milk the platform for base salary, analysts and other resources until management finally realizes you are a clown
Well fuck, I guess there are plenty of quant charlatans too then. I’d imagine there’s a load of overfitted backtesting results thrown around to impress the MM allocators?
...
do you need PhD to do this? In my case specifically...i've spent years doing independent research after working at a bank for a few years as a rates trader (and then getting fired and blackballed by my former boss). Thru my research, which was inspired by what i saw from my market maker seat, i've developed an edge (10-30yr curve and trading 30yr bond futures), but i've found myself not able to convince a fund or bank to hire me as a PM / trader to trade it.
It drives me crazy that if i could go back in time, i think i would kill it with what i know now (i'm a pattern recognition trader)....and now i can't get a shot and don't know how to get back in. Its been 8 years since my last job at a bank...i got a couple looks when i was a trader at the bank, but since i left, nobody will give me a look now. Whats funny/ironic is that back when i was a trader at the bank, i had no clue what i was doing. I had stumbled upon 1/2 of a pattern....and blindly followed that and made money during mean reverting periods...and then got crushed during breakouts. I've since learned how to recognize the breakouts and stop out....so that statistically i'm around 70/30 winners vs losers...and the winners make more than the losers lose. I wish i could trade this now at a fund....but nobody trusts what some guy does at home...and the banks won't hire me either.
I interviewed at 2 of the bigger rates trading MMs a few years ago, and both ghosted me. I would even be willing to trade a 1-lot for some trial period to prove that my edge works...but...i don't know how to get that "audition". semi-unrelated, One of my former bosses is a PM at one of the MMs now and he won't return my call/texts (and i don't want to be a stalker, so i stopped trying)...i heard that last year (2020) he lost 80mm....but he's still there as a PM.
how do i convince one of these funds (that seem to be willing to take a flyer on these quants and PhDs) that i'm a good bet?
Will try my best to provide some guidance truly tricky situation and feel for your predicament. I think your main hurdles have to do with a a few things;
1) Is the strategy repeatable?
2) Is the strategy scalable?
3) Is this person willing to learn, grow and adapt over time as the market evolves.
Oddly enough a graduate degree helps some of these hurdles but mainly it is the "in-depth research" these guys go through that shows sheer intelligence that attracts these firms. Next never ever when talking to a MM style fund say I am willing to trade 1lot or start small that is an immediate red flag for this person has never thought of 1and2. You want to treat that audition just like you are some bad-arse quant or banking hot-shit, you want to show them what is your ideal strategy/situation the firm ain't dumb they will solve what the capital is needed and how to build your book with you.
Further, do not act like the jealous outsider respect those who are in the industry and think man I could kill as I am as good as them. But do not hear rumors and say shit that dude lost $80mm, for all you know he made the firm $200mm last 2 years there is a reason he still has his job and a reason he got it in the first place. When networking with these people do not be pushy right away, try to just catchup with him and talk/shoot-shit about market eff maybe his story to lose $80mm is great. You mainly want to see if this guy or people like him can put you in touch with some headhunters/brokers because end of the day those are the guys who have the pulse of the street after that you need to find a "fund of funds" network type person to target more of the small MM, as an example know a guy who went to a firm called "Eagles View" a year ago or so look it up the guy who runs it basically treats it like the larger MM model. Targeting bank roles at this point based on the path you have taken really is not worth your time.
While doing all of the above you also need to work on some short of deck and shorter form to summarizer you whole strategy/performance. Even better is if you can find some young kid whos interested in this stuff and hire him and get him program/build you some fancy decks. This just starts to show sophistication to your strategy.
The problem with asking a forum like this is that many people will answer with emotional responses trying to justify their inflated paychecks.
The academic data and research is out there and well-defined. Read it and make your own conclusion.
That, and you never know what experience the person actually has unless they're a certified professional. That guy in high school could be John Paulson for all we know
The research isn’t too kind to the narrative funds would like to push tbh
There is a reason, academics thrive and stay in academia. Likewise thoughts attract likewise thoughts.
It’s an industry of cognitive dissonance (see the post above this). No, most/all funds do not have a repeatable process and mean reversion is very much a thing.
source: worked as an allocator and saw hundreds of these funds
Given that you worked as an allocators and you think most places aren’t going to consistently add value, why do institutions give money to active management? Is there a belief that if they give money to a bunch of managers they can get some uncorrelated returns? From what I can tell it seems like trying to pick managers isn’t that different to trying to pick stocks.
My comment on cognitive dissonance and mean reversion extends to LPs/institutions also. Actively destroying value and returns are terrible in general. They’ll justify it by saying they’re finding uncorrelated return streams, purposely keeping risk low, and that the proper benchmark is a 60/40 or 70/30 (which is probably close to being true actually), but news flash - only the absolute best performers (I don’t have the actual data sitting in front of me right now but I’d guess the top 5%) are outperforming a 70/30 or even a 60/40 and they aren’t doing it consistently and definitely not at a higher rate than chance. There was a big article on this a couple years back that you can look up. It feels better to pay a person to go out and invest in these big time PE and hedge fund strategies but you’re getting murdered on fees and will never outperform a 70/30 with any type of consistency. Whole industry is a sham IMO. Complete sales pitch and the numbers don’t back it up.
I sort of agree but to add nuance. A "process" typically connotes a recipe, a step-by-step process that outperforms. Allocators NEED to hear this story. Even the rare allocator that loves you has that small doubt in the back of his mind. So any really good manager has his story pat.
But really there is no "process" in discretionary investing. You spend a number of years understanding everything about everything and apply pattern recognition and emotional modulation. You (the PM) are the repeatable process, just like the head coach is the repeatable process.
A couple of thoughts. On the discretionary side (restricted to high turnover portfolios/short time horizon) I have observed that the top PMs in terms of reputation and tenure consistently make big bucks & good sharpe, but most are mediocre. At the analyst level I have seen both incredible talent and huge idiots.
If you ask Ken Griffin to choose his 10 best PMs and compared their out-of-sample results to 10 random new PMs at Citadel then I would be willing to bet quite a lot that the former will get better returns (esp if each gets an equal allocation of risk).
On the quant side, esp for higher frequencies it's often a battle against trading costs, which also scale superlinearly. If costs were 0, then many many would print money. This is not in-and-of-itself a disproof of EMH of course. But perhaps a common perception is that quant signals are statistically indistinguishable from 0 (which would be true under random walks). This is not generally the case, but instead the hard part is making sure they're stronger than expected execution costs (which are big when you have billions of $). I don't know if this framing helps at all but it's the way I think about it.
Yeah it doesn’t make any sense to pose the problem without transaction costs, they should always be factored in.
Aliquid ex omnis eum. Aliquid at modi quo molestiae nostrum ullam. Ducimus dolore architecto repellat delectus maiores.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...
Recusandae qui saepe esse. Dolorem reiciendis temporibus dicta unde. Quia unde magnam debitis facere tempora ab.
Iste cumque aut repellendus est id reiciendis voluptatum sit. Minima molestiae cupiditate voluptatum aut commodi.
Cumque autem voluptas nobis atque. Iusto nobis consectetur qui. Dolor ducimus itaque pariatur illum rerum excepturi.