It's getting ugly out there - Baly to cut 13 stock teams

Article just hit last night...Baly cutting 13 stock teams (~40 investment professionals) plus a bunch of back office to be cut by end of year. Oct was really bad for hedge funds, Nov has been an official bloodbath. MLP, Citadel, Baly all getting hit hard. Garden leaves vary by firm, but there will be a lot of guys looking next year.

https://www.bloomberg.com/news/articles/2018-12-03...

Hedge Fund Interview Course

  • 814 questions across 165 hedge funds. Crowdsourced from over 500,000 members.
  • 11 Detailed Sample Pitches and 10+ hours of video.
  • Trusted by over 1,000 aspiring hedge fund professionals just like you.

Comments (149)

Dec 4, 2018

It's been ugly out there. Really think L/S is dying

Dec 5, 2018

They should start hiring people who knows how to read a chart.

    • 1
    • 1
Dec 4, 2018

Any truth to citadel and mlp or you are guessing?

I would agree with the guess but haven't heard anything.

I could almost say this year is worse for hedge funds than 2008-2009. A bloodbath in a neutral market.

Array
Dec 4, 2018

I know for a fact both down in Nov worse than Oct, and Oct was not a fun month.

Dec 4, 2018

Pretty sure both MLP and Citadel are doing well overall. But yeah probably tons of teams didn't have their portfolios positioned for this kind of volatility and got blown out. I don't think overall performance of the multistrat firms is that bad.

https://www.bloomberg.com/news/articles/2018-10-08...

Learn More

814 questions across 165 hedge funds. 10+ Sample Pitches (Short and Long) with Template Files. The WSO Hedge Fund Interview Prep Course has everything you'll ever need to land the most coveted jobs on the buyside. Learn more.

Dec 4, 2018

Yeah MLP up 8% thru Sept and still up 4-5% thru Nov but a lot of teams being blown out the last few weeks with more to come.
Citadel prob in best shape of all, but also has the best risk model.

Dec 4, 2018

How in the world are they still up? man, they must be such good stock pickers

    • 1
Dec 4, 2018

Currently recruiting for the big multi strats and was in a process that recently ended (had my references checked). Heard back a month later it was a pass...do you think this could be due to the current performance/volatility?

Dec 4, 2018

I would assume so

    • 1
Dec 4, 2018
Excelling:

Currently trying to recruit for the big multi strats and was in a multi-month long process that ended in October (had my references checked). Got put on ICE for weeks and then got the "they have to pass for now" - any chance you think this could be due to the current performance/volatility?

yes, performance and volatility as well as the fact that teams keep getting blown out so there's a bigger pool of candidates. Smart firms will just wait til Q1 next year to do the hiring when supply >> demand.

    • 3
Dec 4, 2018

Yes, the fact that PMs operate this way (even the ones who are nicer on the surface) should tip anyone off that analysts are very interchangeable and commoditized in this industry.

    • 1
Dec 4, 2018

I get performance updates from hedge funds in my inbox frequently and lately I'm seeing tons of funds down 20-30% over the last three months. In some cases the same funds were up in the 2008. Not sure what to make of it

Dec 4, 2018
Personofwalmart:

I get performance updates from hedge funds in my inbox frequently and lately I'm seeing tons of funds down 20-30% over the last three months. In some cases the same funds were up in the 2008. Not sure what to make of it

The simple way to think of it is that passive/uninformed buyers (ETF, quant, algo) have become a huge chunk of volume...so what worked 10 years ago doesn't work anymore. The guys who don't adapt get destroyed.

    • 2
Dec 4, 2018

Also 2008 was fundamental. This is primarily quant algo driven and some factor investing.

Array
Dec 4, 2018

What makes you so convinced these are algorithmically driven moves? These pseudo convincing narratives without evidence trigger the hell out of me

    • 3
Dec 4, 2018

Look at Citigroup stocks (when Lehman failed) versus say a nvdia or even Apple stock in these moves. The violence is multiples of what it was and these events lack the huge events.

Basically only thing going on is fed might hike too much.

Array
Dec 5, 2018

Don't think Apple was a counter-party to Lehman tho..

Dec 10, 2018
DeepLearning:

What makes you so convinced these are algorithmically driven moves? These pseudo convincing narratives without evidence trigger the hell out of me

For the record, I almost always disagree with @traderlife, however, he is probably right this time around. It's not clear what started this wave, but it does feel like this particular move is, in big part, a deleveraging by the market-neutral players. They are the ones hurting the most and, by appearances, hurting regardless of the market direction (down in Oct, down in Nov, MtD in Dec is supposedly not so good either). Also, correlation has underperformed in this particular selloff, which is a sign that people are dumping both long and short positions, i.e. reducing exposure across the board (as opposed to flipping into shorts). The additional kicker comes from the fact that quant books these days have more or less the same consensus positions as the large L/S books, who in turn are now hurting and liquidating their positions.

    • 2
Dec 10, 2018

Yes definitely seems like it's now coming from them.

Weird the wave started with what seemed like risks parity selling. Big down days with rates crushed too.

Now the market has priced in a recession in 15 months. That seems to be lacking evidence at this point. But it does seem like it's a leveraged guys puke fest which generally returns some normality in 2 months.

Array
Dec 5, 2018

lol so maybe "adapt" and learn how the algorithms trade then? Easy peasy. Goddamn aren't you all from HYP?

Dec 4, 2018

That is obvious. The russel is down 20%. Many stocks more. Unless a fund is day trading or just got flat they are going to be killed. Obviously on net the entire market can't deleverage at the same time or make hft money against each other.

Many need to hold risks over the medium term to earn.

Array
Most Helpful
Dec 4, 2018

I don't get it. Isn't this the time where HFs are supposed to be absolutely killing it? We know that they've had shit returns during the bull market, but the consensus on this forum has been that HFs "are not supposed to outperform the market." They're HEDGE funds, so we're told, a low beta asset class. Isn't this the time where they navigate volatility and put up superior returns? Isn't this their time to shine?

What's the excuse now? Algos? Trump? I'm curious. Really, I am. How many times the geniuses on this forum attacked me for calling out poor hedge fund performance. I would like to know what's up.

    • 32
    • 2
Dec 4, 2018

In times of volatility, the multistrategy firms are going to have some teams who are not positioned well for the kind of vol the market is going under. Others are positioned really well. If you look at overall multistrategy performance, it's been about flat or slightly negative for the month of October. Not sure about Balyasny specifically but Citadel, Millennium, ExodusPoint, etc. were all about flat for October, outperformance of long only. But yeah in times of high vol you're going to have some portfolio managers who were not positioned well and get blown out. Some of course were positioned very well and those teams are sitting pretty. The result is overall flat performance in this kind of environment. The violent drawdowns/overcorrections in the market create ripe stock picking and shorting opportunities, which will likely be realized in the coming months.

Citadel Wellington is up over 8% this year. Millennium is up over 5%. The multistrat firms are doing their jobs on an overall basis. This kind of environment is exactly why the multistrat structure works in the first place. It rewards competence and punishes incompetence.

So yeah, there's no excuse for the PMs at Baly who performed poorly but the multistrat firms overall are extremely effectively hedged.

    • 7
    • 2
Dec 5, 2018

Why do you think BAM in particular hasn't been able to keep up with Citadel and Millennium? They all hire pretty much the same people who trained at the same places. It can't be that the other 2 are just better at picking stock pickers. So is it something to do with their centralized capital allocation, risk control process, support infrastructure, etc.?

    • 1
Dec 5, 2018

I work at one of the firms you mentioned above and my personal opinion is that the industry is still too saturated. The avg level of talent has dropped over the last few years... Too much trend and momentum chasing, not enough critical thinking.

This sort of thing needed to happen.

    • 3
Dec 5, 2018

That would explain why average platform returns are shaking out at mid to high single digits, down from perhaps mid teens historically. But does that really account for a 1000+ basis point gap between BAM and the other 2 this year? Has to be something structural and fund specific, no?

    • 1
Dec 5, 2018

High fees plus their risks systems should limit their upside.

If you are millennium and you never lose money why shouldn't you charge fees that are equivalent to the risks free rate plus a bit of alpha which equates to 7-8% a year.

The business plan is fundamentally take a bunch of highly volatile traders slap a risks system on them and pay out 20% to winning pods and eat the losses on the losers. If their risks systems truly work (to the point of only losing 3-5% in 2008) then you should take out enough in fees to give the pensions and swf a moderate return.

Also a lot have failed at them game. There's probably a dozen funds who tried to be the same thing - some of the macro funds, cohens guy etc.

So IMHO the successful platforms don't have a reason to offer returns higher than 6-9%. If they did better than that they would hike fees. Or the smarter play is to accumulate assets and either way lower returns.

Array
    • 1
    • 1
Dec 5, 2018
sonibubu:

I work at one of the firms you mentioned above and my personal opinion is that the industry is still too saturated. The avg level of talent has dropped over the last few years... Too much trend and momentum chasing, not enough critical thinking.

This sort of thing needed to happen.

I heard Leon Copperman say that since 1991 the number of publicly traded companies has decreased roughly %40 while the number of hedge funds has increased more than 4 fold. That's f**king brutal in terms of competition looking over the same opportunities

    • 3
Dec 8, 2018
Red banana Wagon:

I heard Leon Copperman say that since 1991 the number of publicly traded companies has decreased roughly %40 while the number of hedge funds has increased more than 4 fold. That's f**king brutal in terms of competition looking over the same opportunities

The costs to being public have become too high from a reporting and liability perspective. Why would anyone want to go public outside of growing too big for any other viable exit opportunities?

Dec 5, 2018

deleted

    • 2
Dec 5, 2018

@Esuric was @DeepLearning 's answer sufficient for you?

My suspicion is "no."

Dec 10, 2018

We're going to have to wait and see but no, pointing out a few winners isn't sufficient. The industry, in general, suffers from survivorship bias.

Dec 10, 2018
Esuric:

We're going to have to wait and see but no, pointing out a few winners isn't sufficient. The industry, in general, suffers from survivorship bias.

Survivorship bias? Um... Survivorship bias applies to literally every industry.

Dec 11, 2018

Saying a problem is prevalent does not mean it's not a problem

Dec 5, 2018

They are shit analysts. HYP grads with Bloomberg Terminals don't seem to make great traders for some reason. No other way to describe it lol. I love these long paragraphs below me that don't addesss the question.

    • 1
Dec 5, 2018
Dec 5, 2018
Tony Montana:

They are shit analysts. HYP grads with Bloomberg Terminals don't seem to make great traders for some reason. No other way to describe it lol. I love these long paragraphs below me that don't addesss the question.

Traders don't have to be geniuses. Theirs a lot of guys who are good who are just smart enough. To see things before it's too obvious but not overthinking things and seeing things too far before the crowd.

Array
Dec 6, 2018

this literally. this industry is a prestige driven scam

    • 4
Dec 5, 2018

Just threw a fist in the air for you

Dec 5, 2018

I'm with you on this. It wasn't so long ago that hedge funds marketed themselves as delivering alpha. When outperformance over a market return became infeasible, funds started emphasizing the 'hedge' in their names, stressing the low beta nature of their returns. Now that they seem to underperform in virtually all market conditions, I would say the jig is up.

The problem (as always) is that a handful of funds really do outperform, and everyone seems to think they're able to pick those funds. I had drinks last week with a couple CIOs of major endowments, and they have all moved their private markets portfolios out of HFs and into PE and direct deals. The risk/return in HFs just don't seem worth it anymore.

    • 3
Dec 5, 2018

IMO PE is a fraud and it's just not recognized as widely. PE firms do not report returns as often which has delayed them from really showing enough data to highlight mediocre returns.

If you take away factor investing from PE their numbers are average to bad. They benefit from the small cap premium and increased leverage while also being illiquid so the volatility in their returns isn't apparent. Another weakness is with IRR and capital calls. Endowments having to tie up capital in low return investments waiting for a capital call is a big drag on performance.

Performance for PE blows when you realize they can call capital whenever they want and are basically a leveraged version of the Russell. That strategy should return 13-15% a year just based on factors. And I don't think pe is performing close to that.

Array
    • 11
    • 2
Dec 7, 2018

Most strategies are implicitly short volatility (Distressed, Long/Short, etc.), so many funds are inherently less well-hedged against rising vol/rates than they probably should be. It's the unfortunate consequence of chasing equity-like returns with low vol in the ZIRP environment. Many managers have become very complacent, and will probably continue to underperform unless they truly begin to rework their trading process to become more hedged, or institutional investors will leave for either low/negative beta fund (discretionary macro) or fixed income.

    • 1
Dec 10, 2018
Esuric:

I don't get it. Isn't this the time where HFs are supposed to be absolutely killing it? We know that they've had shit returns during the bull market, but the consensus on this forum has been that HFs "are not supposed to outperform the market." They're HEDGE funds, so we're told, a low beta asset class. Isn't this the time where they navigate volatility and put up superior returns? Isn't this their time to shine?

What's the excuse now? Algos? Trump? I'm curious. Really, I am. How many times the geniuses on this forum attacked me for calling out poor hedge fund performance. I would like to know what's up.

My thoughts exactly. Was going to post something like this the other day so thanks for that!

    • 1
Dec 5, 2018

High fees plus their risks systems should limit their upside.

If you are millennium and you never lose money why shouldn't you charge fees that are equivalent to the risks free rate plus a bit of alpha which equates to 7-8% a year.

The business plan is fundamentally take a bunch of highly volatile traders slap a risks system on them and pay out 20% to winning pods and eat the losses on the losers. If their risks systems truly work (to the point of only losing 3-5% in 2008) then you should take out enough in fees to give the pensions and swf a moderate return.

Also a lot have failed at them game. There's probably a dozen funds who tried to be the same thing - some of the macro funds, cohens guy etc.

Array
Learn More

814 questions across 165 hedge funds. 10+ Sample Pitches (Short and Long) with Template Files. The WSO Hedge Fund Interview Prep Course has everything you'll ever need to land the most coveted jobs on the buyside. Learn more.

Dec 5, 2018

It's great if you trade short-medium term. If you have to do it with quarterly, doesn't surprise me if you are struggling.

Dec 5, 2018
neink:

It's great if you trade short-medium term. If you have to do it with quarterly, doesn't surprise me if you are struggling.

Is less about quarters vs how much you need to be down to be blown out. Most platforms cut capital at down 5%. When you have weird volatility, drawdowns happen as everyone is in the same crowded positions.

Dec 5, 2018

We have the max 5% drawdown as well, so I'm not sure if it's really about that. We killed it in October and I know a handful of retail guys who aren't going to trade much for the next few months.

Dec 5, 2018

Maybe it's because they are bad at what they do? All the "professionals" with BB Terminals seem to make shit analysts idk why.

    • 1
Dec 5, 2018

So all of the so called 'market neutral L/S' strategies are down, but aren't they supposed to be market neutral? They are exposed long to the market then?

Never spoke to HFs PM but my understanding of such a strategy would be, I am assuming Apple will outperform the other blue-chip tech stocks, therefore I am going Long AAPL worth of X amount, and shorting the blue-chip ETF for the same X amount.

Dec 5, 2018

Most l/s play in small caps and try to take advantage of the small cap premium along with better edge in equities with less coverage. They are often short larger companies but not always.

In this environment they should be down money.

The multi strats are a different thing. They are sort of giant day trading platforms.

Array
Dec 5, 2018

Yes I know was just using an example. So overall they are net long

Dec 5, 2018

That would be garbage in 2018. Most players go single stock shorts with etf for factors or excess beta

ELS depends on your names performing as expected which can't happen in every scenario

Problem for managers is if they want to degross, LPs dislike <100 gross despite the inherent risk

Offshore liffe

Dec 5, 2018

From my understanding typically only quantitative market neutral funds are truly market neutral. A lot of fundamental L/S equity funds end up being net long as it juices returns in bull markets. So when there's a big market downturn and you get caught with your pants down net long, you get railed and blow up your max drawdown allowed by your firm.

    • 2
Dec 5, 2018

Has anyone ever tried to have a fundamental L/S Equity shop with a purely market neutral approach? Yes no upside would be captured during the bull run, the same thing could be said for bear markets and downside.
Would you think non-quant strat would be able to offer the same returns if not better returns than quantitative strategives?

Dec 5, 2018

Of course some fundamental L/S groups will be purely market neutral. The point of market neutral is to make money a positive return under any environment above the return of treasury bills. The difficulty with fundamental L/S market neutral is that it's difficult to take enough positions in order to get a beta of 0. You can only analyze so many companies on a fundamental basis. The high concentration of positions makes it difficult to maintain constant market neutrality but you can generally come close. To be truly market neutral you have to hold at least 40-50 stocks in both the long and short leg generally speaking. Depends on your stock universe obviously.

    • 5
Dec 6, 2018

Thanks for the insight that makes sense.

Dec 14, 2018

Learned a lot of really interesting and useful stuff from this thread, specifically from you, cheers @DeepLearning

Dec 7, 2018

I think there used to be far more fundamental EMN managers as a % of the total L/S universe a couple of decades ago than there are now. Fundamental EMN is simply a basket of pairs/correlation trades, whether done using cash equities or options/swaps. The problem is that the strategy is implicitly short volatility. During periods of low vol, smart traders can identify asymmetric opportunities and exploit mispricings; however, rising vol in equity markets just drags down the entire equity market, so suddenly correlations spike and supposedly "market neutral" funds either underperform or lose money outright. That's why quants have surpassed fundamental EMN in terms of AUM because they can more easily diversify away idiosyncratic risk just due to sheer processing power.

I think the irony is that as EMN funds have gotten more and more powerful (both in terms of AUM and processing power), the trades have become more and more crowded. So, now is probably a good time for fundamental EMN managers but nobody's actually going to give them additional funding...

    • 1
Dec 14, 2018

Just so I can understand better, you're saying fundamental EMN funds are implicitly short vol because asymmetric opportunities are more readily evident/exploitable during less turbulent market environments? I understand why a sideways market allows for a higher win rate on correlation trading, but I think I'm confused as to why the strategy is implicitly short vol. Feel free to dumb down a response because I'm not familiar with EMN strategy.

Dec 14, 2018

In essence, yes. During periods of low volatility, managers can more easily extract alpha by exploiting asymmetries in correlations, covariances, cointegration that typically follow mean-reverting patterns. However, when volatility is increasing, equity market correlations across the board sharply increase, dragging the entire market down, making it harder for managers to exploit those opportunities. Low volatility typically provides the best environment for price discovery, allowing arbitrageurs/stat-arbs to profit on these gaps.

I'll give you an example of a classic pairs trade to illustrate the idea. Let's say you have two stocks that typically trade with a correlation close to 1 (say KO and PEP), but you observe that the correlation between the two over the past month has dropped to 0.4 because KO has appreciated and PEP has moved sideways. You would place a trade that profits if the correlation reverts back to the mean (either long/short equities through a pairs trade or using correlation/covariance swaps). However, if there's a market shock event and equity vol (and cross-asset vol subsequently) spikes, both KO and PEP will fall. Now, even though correlation reverts back to the mean (because both KO and PEP fall along with the market), the market drawdown still caused you to lose money, either on one leg of the trade or both. That's why many stat-arbs don't always provide strong positive returns in rising vol environments. Most typically end up flat or negative.

    • 1
    • 1
Dec 14, 2018

Super helpful, appreciate it!

Dec 14, 2018

I would think that would be a great time to be a stat arb. Markets are falling. You might have one fund blowing out if coke while Pepsi is bid giving a great chance to throw on the mean reversion.

However my guess is in a de-risking market that other stat arb funds have the same trades on and may be derisking forcing those spreads to widen.

Array
Dec 14, 2018
traderlife:

I would think that would be a great time to be a stat arb. Markets are falling. You might have one fund blowing out if coke while Pepsi is bid giving a great chance to throw on the mean reversion.

However my guess is in a de-risking market that other stat arb funds have the same trades on and may be derisking forcing those spreads to widen.

Oh my God, I agree with you again. What's the world coming to!?

Dec 14, 2018
Billymazee:

In essence, yes. During periods of low volatility, managers can more easily extract alpha by exploiting asymmetries in correlations, covariances, cointegration that typically follow mean-reverting patterns. However, when volatility is increasing, equity market correlations across the board sharply increase, dragging the entire market down, making it harder for managers to exploit those opportunities. Low volatility typically provides the best environment for price discovery, allowing arbitrageurs/stat-arbs to profit on these gaps.

Historically (and common-sense wise, btw), the exact opposite has been true. Volatility creates dislocations that are the opportunities for statistical players to make money. In fact, if you look at the historical performances of the equity quant funds, they usually make money when the market is moving. This time it's been different, in big part due to how crowded the quant space has become - if anything, quants are creating their own volatility as they are getting squeezed out of the consensus trades. The last time we saw this was the summer of 2007.

I was going to dissect your example, but decided that I need to smoke some weed first :|

    • 2
Dec 14, 2018

It's fairly simple when I talk about market structure issues you agree.

When I talk about the system as a whole compared to the world and what's going on you disagree. You don't think like that. I do both.

You know how much the market structure has changed. In 2007 we had a full fledged financial crisis to blow up market structure. Today we have non of that and some of the most consistent job growth the economy has seen.

A lot of it there's just fewer bill miller value investors and 10-30 times the amount of money in quant and their multistrat variant with tight stop outs. There's no one to balance the other side of the equation.

Array
    • 1
Dec 14, 2018
traderlife:

When I talk about the system as a whole compared to the world and what's going on you disagree. You don't think like that. I do both.

After a certain time in this business, everyone thinks at the system level, it's a natural progression. Old age brings perspective. The real question is what you do with it and that's where we differ. I hate making predictions and it's hard for me to understand the mindset of people who do (cause you are going to be wrong most of the time). To be honest, some of your ideas strike me as simplistic (no offense), while some other are superb insights. I guess that's what makes our conversations interesting, right?

traderlife:

You know how much the market structure has changed. In 2007 we had a full fledged financial crisis to blow up market structure. Today we have non of that and some of the most consistent job growth the economy has seen.

It's very easy to make these arguments in the hindsight. On one hand, we could be simply having an industry (quant) level crisis, that's for sure. Personally, I think quant industry deserves no less :) On the other hand, in 2007 nobody knew what's going on and I recall plenty of people making the goldilocks arguments and bringing up "the strongest market we've ever seen". I totally could see some unknown unknown coming up in the next few months that would make this turmoil justified. Market works like this sometimes, first volatility as a "premonition" and only then concrete information, IMHO.

    • 3
Dec 14, 2018

If something bad was going to happen I would see it. The things that can go bad right now (not counting Europe which has dysfunctional institutions) would have to be human errors. The three most important people in the world right now would be Jerome Powell Donald Trump and Xi. I can put together a scenario where the snp trades 800. I don't see it. That requires Jerome Powell to hike rates to cause a recession and Donald Trump to decide the trade war is more important than the economy or getting re-elected. And Xi well the Chinese value stability more than anything. He just wants to get a deal done without looking bad. He's likely mostly confused as to the why this is a huge issue....China already went to a neutral trade deficit years ago. There's always a chance of policy errors but no one has the incentive.

The bear case on US equities would be the fed has already hiked too much. In which case data will suck first quarter causing the fed to talk about cuts. Then they do that the economy picks up speed again and equities go up. Market is already pricing in a mild recession. Banks and industrials are cheap. Banks at 7-8 times earnings are only to be sold if we are facing a financial crisis. Haven't looked it up but I wouldn't be shocked if bank market caps are at or lower than they were AFTER Lehman failed.

There is some quant/momo factor distorting something. I have no idea who lifts Apple at 235 and sells 160 in a month. Makes no sense to me. I got stopped out of a nvdia short at like 280 from 260. I think that had something to do with passive or momo. I looked at intel in 2000 second they missed once on guidance stocked tanked 60%. That's kind of how it's suppose to react. We've been seeing these giant waves all year. My gut says there's not that much money doing "simplistic" obvious things. I looked at lumber recently huge blowout high then 50-60% crash. Non of this makes any sense to me in an economy doing 150-200k jobs nonstop for years. It makes me fairly certain these things are coming from market structure issues.

As far as I can tell it doesn't fit the data to me. This isn't a booming economy. It's also not an economy showing any stress. My guess it's quant momo factors magnifying and playing off each other to exacerbate any move.

Array
Dec 17, 2018
traderlife:

If something bad was going to happen I would see it.

Well, that's one way of looking at it. I, personally, nowhere near that confident in my foresight.

traderlife:

There is some quant/momo factor distorting something. I have no idea who lifts Apple at 235 and sells 160 in a month. Makes no sense to me. I got stopped out of a nvdia short at like 280 from 260. I think that had something to do with passive or momo. I looked at intel in 2000 second they missed once on guidance stocked tanked 60%. That's kind of how it's suppose to react. We've been seeing these giant waves all year. My gut says there's not that much money doing "simplistic" obvious things. I looked at lumber recently huge blowout high then 50-60% crash. Non of this makes any sense to me in an economy doing 150-200k jobs nonstop for years. It makes me fairly certain these things are coming from market structure issues.

The stock market can influence the economy almost as much as the economy can influence the market. A simplistic version would be with quants selling (and it's more than just quants by the looks of it), no structural buyers materialize and the economy takes a hit, a la '98. What do you think would happen if the stock market tanks 40% due to "momo factor"?

PS. Personally, I don't think it's purely structural anyway. In part, this is a liquidity tantrum. The Fed is tightening, the ECB is pulling liquidity too, even the Japanese are pulling out albeit a bit less aggressively. Add to it trade concerns, Brexit, somewhat unpredictable upper management in US etc.

    • 2
Dec 19, 2018

Mea culpa. I guess I'm wrong. A novice fed chairman is a problem.

The Fed causes recession (in the base case you are a highly diversified economy like the US).

My base case is now a mild recession in the next 4 years.

It wasn't terrible that he hiked 25 and dot plots were at 2. It's that he completely wrote off the markets in his speech. As much as I think this move in stocks and bonds is driven by risks management systems and quant funds; the issue is we do not have a fed that cares about markets. It's data dependent. One of those data points should be the market. I personally think it's less efficient as a price signal today than in the past (a point agreed with me from Druckenmiller, mnuchin, trump) nonetheless it's still a signal that needs respected.

The correct response today by the fed would have been no hike. As good as the data looks it's still backwards looking and you have to respect the market that something bad is happening.

We are sitting at very reasonable valuations. 7.5 times this years earnings on the big banks are recessionary or more. Oil down $80 to $45 should be alarming. Small caps and cyclicals crushed. Inverted yield curve at some spots.

My base case is we have an incompetent fed that will be backwards looking. Which means they loosen policy once the data looks ugly. That means we get a mild recession and the fed sees the data turning south and cuts instead of being proactive and taking market data as important. All honesty if I looked at market data and not economic data I would have cut 50 bps today.

I mean equities are down 25-30% in 3 months. I just saw a condo that was listed at $4 million for 18 months sell for $2 million (he was listing stupid but still and had moved away and some other factors)

I would still take the view stocks rally back to close to their highs in the first quarter. Valuations are great and the data won't turnover that fast. But maybe a crash first.

This is the same thing we saw in 2008. I remember jim Cramer going on the air and saying the fed knows nothing. They may have paused or not hiked. Then cut 100 bps in an intermeeting period.

This isn't that period. But I'll quote Donald trump to end this "cant you feel it"...

Array
    • 2
Dec 19, 2018

The S&P 500 is down 15% from the high (2940 --> 2490), over the last 3 months.
i don't think the Fed will try to save the stock market until the S&P 500 is under 1800....thats where i think the fed put takes action. Would take another Lehman event to get below that.

What good are massive tools if you don't get to use them? The Fed creates bubbles...the Fed bursts bubbles...the Fed saves the market and creates new bubbles...etc...the cycle repeats.

Also, the fed hates Trump (as a person) and they would like nothing better than to crash the market while he is president...thus helping to ensure that Trump does not get elected to a 2nd term. Then, the Fed can make financial conditions easy after Trump is gone and everything will be rosy again.

just google it...you're welcome

    • 1
Dec 19, 2018

The fed Job isn't to protect wall st. It's to protect main st. People say it's wall st. But the truth is wall st is the best forward indicator for the economy. And the best thing for main st is a stable economy.

"Risks" is already priced at 1800. If you did the stock market and backed out utilities health care and consumer staples it may not be 1800 but 2100 or so.

Powell fucked up. Cuz he just lost expectations. Which completely changes any financial structure. Stocks are at 666 with bad monetary policy. Anything can happen which means it will.

I've never believed in a fed put. But I do believe the fed should want to maintain NGDP growth which equates to about 2% inflation plus 1-2% population growth and 1-2% productivity growth. Which if they do that kinda turns into a fed put but it's not the purpose of it. Stocks are flashing (and oil and yield curve) a major mistake. All those indicators would be wrong if the fed did what they should of done, but they are all right when they make mistake.

Everything in monetary policy is about expectations of how it will effect growth.

Powell's a private equity guy. Every private equity guy I know is begging for a recession. Cuz current deals will suck so 0% carry but buying in a recession and selling into an upturn will generate huge carry. He delivered.

Array
Dec 19, 2018

imagine reversion to the trendline....
growth index

just google it...you're welcome

    • 1
Dec 19, 2018

But there is no bubble now. Like a sp500 16 multiple? Inflation below 2%. Nobody buying homes. Europe's never recovered.

This is the third worse policy mistake I've ever seen. Between Jim Cramer's you know nothing speach and the fed hiking 100 bps and Europe hiking Italy into a crisis with a 25 bps hike.

Powell will likely apologize in 72 hrs. Yellen will yell at him.

The fed real job is to maintain is to roughly maintain wage growth at 2% plus productivity or about ngdp targeting.

But truth is you can't price any asset when fed isn't maintaining nominal growth. Sp 500 can trade 666 on bad fed or 4300 on good fed. 30 treasuries with 3.7% on good fed or 50 bps in bad fed.

Array
Dec 21, 2018
traderlife:

Powell will likely apologize in 72 hrs.

No chance of that. He's got Fed's credibility to uphold.

Dec 21, 2018
traderlife:

But there is no bubble now. Like a sp500 16 multiple? Inflation below 2%. Nobody buying homes. Europe's never recovered.

This is the third worse policy mistake I've ever seen. Between Jim Cramer's you know nothing speach and the fed hiking 100 bps and Europe hiking Italy into a crisis with a 25 bps hike.

Powell will likely apologize in 72 hrs. Yellen will yell at him.

The fed real job is to maintain is to roughly maintain wage growth at 2% plus productivity or about ngdp targeting.

But truth is you can't price any asset when fed isn't maintaining nominal growth. Sp 500 can trade 666 on bad fed or 4300 on good fed. 30 treasuries with 3.7% on good fed or 50 bps in bad fed.

There have been a lot of times where CNBC thought the Fed was wrong, but turned out the Fed was right.

This is one of those times where I personally disagree with what the Fed did. I think this is too much, too fast.

I don't think this is one of their three worst moves since FDR. By any means. It was a judgment call and in my view they should have stood pat. But it was a 25 basis point mistake.

    • 2
Dec 21, 2018

25 bps can cause depressions. Level of rates don't matter it's all about the expectation channel. And the issue here is the fed said they won't protect risks assets which then changes how people invest.

Not that I think the fed should target a price on stocks, but the market is indicating something very bad is happening.

Not sure if it's as big of mistake as I thought initially, but it could be.

Array
Dec 21, 2018

While S&P multiple of 16 is close to avg...its more reasonable to think of the avg multiple as more of a range between 10-20, centered at 15...and we are on the way from the high end-->low end. So, expect the S&P multiple to move towards 10 before the Fed stops tightening. Recall before Janet Yellen left the Fed, she said that the equity market was overvalued...and Ben Bernanke said the same thing. They telegraphed that they were PLANNING on taking down the stock market...and NOBODY listened.

Also, there is a time delay between Fed actions and impact in the real economy. It will probably take about another year of Fed Tightening to really impact the main economy...just in time for the next Presidential election. If the Fed wants to help ensure that Trump does not get elected to a second term, then they will keep on tightening.

just google it...you're welcome

Dec 21, 2018

Should are wrong on sp multiple. You need to back out data from times when inflation was over 10%. This market is screaming cheap but in a liquidity vacuum. My forecasts for the correct multiple on the snp is 25 times. Interest rates are proving to be stuck at sub 3%. A 25 multiple provides about a 7% yearly return at constant multiple plus 2% inflation plus about 2%rgdp. A 4% risks premium is fine.

The fed really shouldn't care about trump. You think they prefer to put ten million maybe 20 million Americans out of work so that trump isn't re-elected.

Array
Dec 14, 2018

If something bad was happening I would see it. That's my primary training.

Array
Dec 21, 2018
traderlife:

If something bad was happening I would see it. That's my primary training.

This is a perfect argument for the Fed to tighten...and return interest rates to a "normal level". Zero Fed Funds and a 4 Trillion balance sheet is NOT normal.

just google it...you're welcome

Dec 21, 2018

The feds only mandate is to maintain 2% inflation and full employment. They should run as easy or tight of monetary policy as necessary to achieve those goals.

Also what is normal interest rates? I'd argue we are already to high. What's a normal balance sheet?

Normal rates are closer to 2% than 5%. Venetian rates were I believe sub 4% on their perpetual.

Array
Dec 21, 2018

normal balance sheet is Zero.
normal rates would be same as before 2008...in the realm of 5%

So, going to 3% fed funds, and 2 Trillion balance sheet is still "accommodating"

Its not the Feds role to fund growth...just stability. The stock market is still too high....we were living on borrowed time for the last 2+ years.

The S&P should be trading at 2000. Anything above that is over valued.
We will probably swing below 2000 temporarily in a crash...because that's what markets do.

just google it...you're welcome

Dec 21, 2018

The normal rate is the rate that achieves about 4.3% nominal gdp growth...real plus 2% inflation.

It's beyond clear that 5% rates are a thing of the past. 5% rates would cause a Great Depression. 30% unemployment. 5% a year deflation so a real rate of 10%. Why should savers get 10% for owning a bank account.

Array
Dec 15, 2018

I think ordinarily, this should be true, but what we've seen is that many notable stat-arb funds perform poorer than what would be expected given their resources. I work in HFOF, so my line of thinking typically seeks to provide maximum diversification and a zero beta for several different benchmarks (S&P, ACWI, DXY, ML High Yield, realized vol), and most of the stat-arb firms still provide little to no additional benefit in reducing beta/exposure to realized volatility (hence why I think many are implicitly short volatility) compared to more discretionary macro/tail hedge type funds.

Dec 17, 2018
Billymazee:

I think ordinarily, this should be true, but what we've seen is that many notable stat-arb funds perform poorer than what would be expected given their resources. I work in HFOF, so my line of thinking typically seeks to provide maximum diversification and a zero beta for several different benchmarks (S&P, ACWI, DXY, ML High Yield, realized vol), and most of the stat-arb firms still provide little to no additional benefit in reducing beta/exposure to realized volatility (hence why I think many are implicitly short volatility) compared to more discretionary macro/tail hedge type funds.

What is the data window you are looking at, last 5 years or something?

    • 1
Dec 20, 2018

I have data stretching back the past couple of decades, and many stat-arbs have truly failed in providing diversification and crash protection during >1sigma left tail events. Farallon had a dismal 2008, along with Citadel, DE Shaw's Composite, most of AQR's funds, Bridgewater Pure Alpha, and a handful of other multi-billion AUM names. To be fair, they didn't do nearly as poorly as most Equity L/S funds, but the notion that they're bulletproof is just not true.

I don't dislike stat-arbs by any stretch, and I believe they play a terrific role in portfolios. I'm particulalry fond of Millennium, Renaissance, and DE Shaw, and think they're excellent managers. You just have to be careful with your assumptions and make sure you evaluate through periods of truly high volatility. It's easy to look at the past 5 years, see little correlations across benchmarks and think "What do you mean they're implicitly short volatility?"; stretch back the data to before 2008 and you see who is truly uncorrelated.

Dec 21, 2018
Billymazee:

It's easy to look at the past 5 years, see little correlations across benchmarks and think "What do you mean they're implicitly short volatility?"; stretch back the data to before 2008 and you see who is truly uncorrelated.

By the nature of the industry, anything that's common is correlated to the market. Multiple factors contribute to this - crowding, liquidity, cross-margin calls. I would go as far as to say that people who are truly uncorrelated can only do so by design (e.g. by being biased towards long convexity and avoiding consensus trades).

    • 1
Dec 5, 2018

Bloomberg has new articles up.

Listing citadel as up 8.5%, millennium 4.2%, point just says flat on year, baly down 5.3%.

No idea if these are before or after fees. Total performance holding all 4 would be 1.9%. Essentially a lost year. And perhaps more position puking next few days.

Array
Dec 5, 2018
traderlife:

Bloomberg has new articles up.

Listing citadel as up 8.5%, millennium 4.2%, point just says flat on year, baly down 5.3%.

No idea if these are before or after fees. Total performance holding all 4 would be 1.9%. Essentially a lost year. And perhaps more position puking next few days.

sounds about right... Is that Kensington/Wellington or Citadel Global Equities?

Do you have a link?

Dec 5, 2018
sonibubu:
traderlife:

Bloomberg has new articles up.

Listing citadel as up 8.5%, millennium 4.2%, point just says flat on year, baly down 5.3%.

No idea if these are before or after fees. Total performance holding all 4 would be 1.9%. Essentially a lost year. And perhaps more position puking next few days.

sounds about right... Is that Kensington/Wellington or Citadel Global Equities?

Do you have a link?

Found it: https://www.bloomberg.com/news/articles/2018-12-05...

    • 1
Dec 5, 2018

Yikes... Probably going to stay where I'm at then. Was interviewing with one of the multimanagers and haven't heard back in over a week

Dec 5, 2018

And these numbers before Nasdaq was down close to 4% Tuesday and so far close to 2% right now.

That being said I would assume you blow your teams out before the articles hit the news.

Decent chance these funds at least all but citadel end up down on the year. Baly seems like they've already blown out so I would guess there numbers are about where they finish.

Array
Dec 6, 2018

These return figures are reported for platform as a whole. I wonder how MLP/Citadel/Baly macro teams are doing vs. L/S equity. I feel like these are the exact market conditions where macro outperforms. Eurodollars, tsy's, oil, gold, S&P all moved fast these past few months.

Dec 6, 2018

Don't work at one of those places but the macro portfolios at my firm are slightly outperforming benchmarks

Dec 7, 2018

The oil geniuses are all bankrupt. Not sure on the platform versions. Bbl and andurand in pain. Andurand down big. Bbl haven't seen an announcement but from what I've heard they don't exist anymore.

Then a lot of losses in natty. Citadel supposedly up but took some heavy losses in the natty blowout.

A lot of oil funds were hit in the summer. Bp lost 300 on Brent-wti spreads though obviously they make a ton in physical. Geneva shut down oil. Socar (Azerbaijanis) trading ops shutdown. A lot of deaths this year in oil. Probably some winners....but I haven't heard of who.

Citigroup also said bug fixed income losses. Probably some of the macro doing well.

Array
Dec 7, 2018

yeah saw that about C: https://www.bloomberg.com/news/articles/2018-12-05...
Read that Element up big being long Treasuries, Citadel lost money on Hungarian IRS.

Dec 7, 2018

From the forbes article: To control risk, individual portfolio managers are typically forced to sell positions after relatively small losses. To make money under those constraints, the firms employ heavy leverage.
Sounds like someone privy to the PnL of these firms could come up with a strategy to trade...

Array

Dec 7, 2018

Something in that description seems hard to believe.

Citadel is massive.

Highly leveraged. Puke on a small loss. Huge asssts under management so net positions huge. Wouldn't slippage be gigantic

Array
Dec 5, 2018

I received an offer from Balyasny about 18 months ago. The offer was good, but I decided not to work there. It was on a big data/ML team there. Staggering to me how little those people knew about technology, Machine learning, alternative data, etc. They all had great looking resumes though, completely UNQUALIFIED. I went to an actual quant fund that's crushing it, no prestige in the name outside of people who actually know.

The truth of the matter is that there are quant funds that are crushing it, ones who stay out of the news, arent big names among the HYP crowd. Want to know why? Their employees are math PHDs with actual skill sets, not these frauds coming out of ivy league schools relying on the beta of the us stock market.

The finance world is going through a reckoning because the barriers to entry on investing have come down, so people who can actually sniff out alpha are destroying the old boys club. The game on this sham is over.

I know an insider at PIMCO who remarked that in the Bill Gross years, most of their returns came from a few guys making huge intuitive/gut based bets on the market. All of the research etc was used to sell clients to get the investment money in the door. This industry is in for a rude awakening.

    • 2
    • 3
Funniest
Dec 5, 2018

You sound like some feminist cuck trying to blow the whistle on absolutely nothing; pls go rant vaguely somewhere else

    • 4
    • 4
Dec 6, 2018

I met the people in these groups at Balyasny, nothing impressive. Get mad about it

    • 1
Dec 7, 2018

i've heard the same about baly quant/data teams....in terms of data/quant quality, i would say baly < MLP < p72 < citadel.

the rest of what you said is vague ranting tho

Dec 6, 2018

I don't believe that was true for pimco at all. Bill gross would go in the news and highlight his bold opinions and calls. But a lot of money and alpha was made just by choosing between smaller factors and not huge macro bets.

Now they did do the macro bets but a lot was picking cheap parts on the curve or tilting towards credit or selling vol etc.

Array
Dec 6, 2018
traderlife:

I don't believe that was true for pimco at all. Bill gross would go in the news and highlight his bold opinions and calls. But a lot of money and alpha was made just by choosing between smaller factors and not huge macro bets.

Now they did do the macro bets but a lot was picking cheap parts on the curve or tilting towards credit or selling vol etc.

Pimco used to be a sess pool, buying securities no one could price, slapping some arbitrary price on them, and then selling them to investors who didn't know anything. You'll never hear anyone speak a word of it though. Gross did make a ton of macro bets, but they were way more intuitive than anything else. The rest was a huge show, meant to get money in from investors. Argue with me all you want, it's true.

    • 1
    • 2
Dec 20, 2018

This is how much of the money management industry has always worked.

Dec 6, 2018

The key to paired portfolio losses isn't market drawdowns. it's the liquidity events after drawdowns.

These pod models are like sharks. They only breathe when moving one direction. When money flows reverse, they lose money.

However, this phenomenon usually ends quickly. Risk managers force everyone to cut their books down.

    • 2
Dec 9, 2018

Millennium is a complete shit place to work, but their record is unparalleled. I'd say Point72 is a distant second, followed by Citadel. Everyone else that has tried to pull off the multi-manager thing sucks.

None of these macro/structural guesses explain it either - so much of it comes down to execution on things no outsider can really understand.

L/S is pretty much dead though - 99% of the funds out there are just complete garbage.

Dec 9, 2018

Why do you say Millennium is a shit place to work?

Dec 20, 2018

Insane turnover. Don't even pretend to give a shit about analysts. Comp and benefits actually suck (especially on a risk adjusted basis). Pay lower base, worse benefits, and of course bonus is all discretionary and PMs keep as much to themselves as possible.

Dec 20, 2018
dazedmonk:

Insane turnover. Don't even pretend to give a shit about analysts. Comp and benefits actually suck (especially on a risk adjusted basis). Pay lower base, worse benefits, and of course bonus is all discretionary and PMs keep as much to themselves as possible.

My take is that it depends on the PM. To be sure, a lot of the turnover comes at the PM level, which an analyst can't control, but let me address some of the other points.

Having worked for three or four managers, I can usually get a good read on whether they're a nice person to work for or an asshole.

In general, someone who is not an asshole is not going to completely screw you on comp. My definition of completely screw you means that you bring more than 40-50% of the value to the PNL for some signal or idea, but get a single digit percentage of the PM's take from your contribution without much risk on the PM's part.

I would not advise against Millennium, but I would advise against Millennium to the uninitiated. You need to have had some experience working for at least one asshole. You need to be a good read of situations and people. I have interviewed with PMs at Millennium where my response was not to walk but to run. Guys who got the gig by dint of the fact that they were portfolio engineering experts, but I knew more than them. And the more we spoke, the more I could smell the blood, and the fear about the fact there was stuff that they didn't know that they didn't know. And they were still desperately fronting. This guy is going to be a disastrous PM. (The mark of a good Quant PM, when there's stuff he knows he doesn't know, is a very confident "That's something I have a feeling you might know more about than me. I'd like to hear more.")

There is also the risk that your boss gets stopped out, and HR is firing the entire team the next day.

There is a kinder gentler way to run this business, while respecting capital just as much, than how Millennium runs it. But there are also some good people and opportunities at Millennium. Look for the servant leaders; the guys (and girls) who understand it's better to own 30-40% of a great portfolio than 80% of a failing portfolio; who want the best team, and want everyone to get rich with them. And in return, be the kind of researcher who understands that the stress of dealing with Izzy is worth a good 20-30% of the attribution, minimum. The trade/signal approval process is worth another 20%, the portfolio engineering is also worth something, and the fact that they decided to bet on you rather than someone else is also worth something. And to whatever extent you can help it, don't add to their stress.

If you're working in the hedge fund space for a horrible boss; if you are a PM who works for Izzy (that certainly qualifies), send me a message. I'm an equity statarb quant, but even if you're a fundamental guy who trades or researches by hand, we can help each other. It's tough out there, but there's a lot of unnecessary stress, and sometimes that kills our best ideas. I think there's a way to fix that over the long term, and we should at least be in touch.

    • 5
Dec 8, 2018

Couple quick thoughts, though I've been out on a noncompete for a year.

1.) There is a continuum between alpha and "beta" (risk factors).
2.) Most firms run on a vendor risk model. Why? It provides a shared language for risk that doesn't have some risk of being proprietary or biased. Some investor asks what's your exposure to Book to Price-- ok, you can give an independent vendor number. The investor isn't worried about whether the measure is biased, and you're not worried about giving away your IP. Now, they might add some risk factors on top of that, but that's a good place to start. Now, the truly elite-- the RennTechs of the world, might not do that for all I know. But most of the quant shops that don't need Math Olympiad medalists and can still do well start from a vendor model.
3.) Back to (1). If RennTech, 2Sig, or DE Shaw finds out that BlackRock is calling something an alpha, they are probably going to call it a risk factor. Nothing against BlackRock-- a lot of smart guys, but BlackRock means there's probably too much capital chasing an idea for it to be an alpha for some firms.
4.) From what I am hearing, a lot of the traditional funds are interested in getting into completion books. It's sort of a hybrid between quant strategies and traditional long/short equities in that it helps figure out the most efficient hedge to your position.

Now obviously it's a political nightmare to figure out the attribution, especially for the Type-B quant who has to try and figure out something fair for a bunch of Type-A PMs, let alone something that he can explain to them. "Umm, your hedge position for Chevron works out to these 200 different firms, and the position is also going to change every day in very strange ways that really depend on what other positions there are in the book". It's also a technical nightmare for a traditional equity fund which isn't used to supporting anything much more complicated than Capital IQ. But if there's a way to cut through the politics and the technology, I think it can help a lot of firms out there. If you're confident in your firm's stock picking skill, it's a cheaper and better way of hedging risk.

Since I've been getting looks from a number of traditional equity firms on the basis of "We want a completion book", I've been doing some thinking about the political nightmare a quant faces on this. Somehow you need to make the system understandable to a PM with a UChicago MBA. Which means they're smart-- probably brilliant, but you can't explain things in terms of anything beyond Newtonian Physics to them. Everything needs to get boiled down to about 5-10 numbers that can fit on an Excel screen. And you need a lot of political buy-in. You need a bunch of PMs who are getting screwed on weird risk factors all of the time and are pissed off about it. They're great stock pickers, but they're bad hedgers.

And then you're going to need a quant with a spine and a strong sense of fairness. He's gonna have to help sort out all of the conflicts of interest and be as transparent as possible. And it's going to be tough to pull it off at a firm where the PMs are sharks and screaming Type-A personalities. That's just not how systematic quants work. But if there's a cultural fit, it might work.

    • 5
Dec 9, 2018

I might as well get my plug in. My guess is that somewhere on WSO, there is an Equity Long/Short PM or even COO reading this. And somehow the firm's been generating alpha but getting screwed on factor risk. Either the attribution system is killing him/her or the firm's weird factor exposures are hurting the attribution. Hopefully the firm has at least $5 Billion AUM and a geeky culture where a couple of soft-spoken Type-B quants running the attribution portfolio won't get eaten by sharks.

If that's you or your firm, we should talk. I've got a couple things progressing nicely with two other firms, but I don't want to put all of my eggs in one basket. And it might be worth it to hear about how a quant or two might be able to help you. If you're really conservative, just to run portfolio sabremetrics (moneyball style) and help with risk, but if you're comfortable going further, to help set up a hedge book.

There aren't a lot of quant portfolio engineers out there-- my guess is ~500 total; 800 if you include quant PMs. There might be twice as many solid alpha devs (My sense is that DeepLearning is one of them, and he mentioned he had been interviewing on this thread). But even if I get yanked somewhere else, or I'm not a good fit for your firm, I'd be happy to talk, and it makes sense to talk. For you, there will be more guys on the market next year if nothing else. For me, I haven't landed a firm offer yet, but more importantly, if I get a trend started for completion books at equity long/short funds, that creates a lot of long-term opportunities for everyone, including me.

    • 1
Dec 9, 2018

Bit off from what you're looking for but Exxon may be. Though what I've heard is that they are starting from scratch.

Dec 9, 2018
DeltaDecay:

Bit off from what you're looking for but Exxon may be. Though what I've heard is that they are starting from scratch.

As in Exxon Mobil? (I take it this is for their physical commodities portfolio)

Thanks for the tip-- a bit of a strengths gap (I am equities), but until I have a firm offer in hand, beggars can't be choosers.

Dec 10, 2018

From that angle, it sounds like you would have an easier time going for a risk management role at a quant fund, or on the Central Risk Desk at a bank. Might have better luck than approaching individual PMs because the need for this skill set for them is not as clear.

Dec 10, 2018
believeit:

From that angle, it sounds like you would have an easier time going for a risk management role at a quant fund, or on the Central Risk Desk at a bank. Might have better luck than approaching individual PMs because the need for this skill set for them is not as clear.

Maybe. It's not just about hedging risk; it's also about internal crossing and efficient execution of trades, and sometimes a little bit of intellectual honesty about the less-well-known risk factors. And then it's an opportunity to lay some statarb alphas on top of that. A good statarb book ought to be able to pull a Sharpe of 2, maybe 2.5 with a little more sophistication. If you lay some traditional human stock-picking alpha (but it has to be real alpha and not risk factors) on top of that, you can boost it by another .5 and get the capital efficiency up.

Mostly I've been talking with COOs and CEOs. But for a smart PM, attribution is a headache, too. You have some firm that's generating specific returns but losing money to risk, it's hard to pay bonuses from the attribution.

BTW this conversation about what alpha really is is interesting. All I am going to say is that it's really easy to differentiate between alpha and a risk factor by looking at an event study (and you can run this on anything where you have enough data, from human trades to quants). Every well-known risk factor is going to look roughly the same. I think the smart PMs will know what I'm talking about

The firms that have alpha are trying to hedge their risks, get their Sharpe ratio up, and get more efficient exposure to their alphas. At the end of the day, a completion book is an exercise in intellectual honesty and confidence-- it's not for everyone, but for the firms that think they can get their Sharpe to 2, it's often worth pursuing.

    • 2
Dec 10, 2018

The issue is that hedging techniques cannot bring a sharpe 2 strategy up to a sharpe 4 without bringing significant alpha to the table (and in that case, it could function as its own standalone strategy). If the most it can do is shave a bit of costs here and there, it could only bring a sharpe 2 up to a sharpe 2.5, then it could be a long time (years) before you can even statistically significantly say it had produced any material impact on the portfolio. And in that case, a PM could just hire another alpha producer who would have a more direct impact on PNL anyway.

Dec 11, 2018
believeit:

The issue is that hedging techniques cannot bring a sharpe 2 strategy up to a sharpe 4 without bringing significant alpha to the table (and in that case, it could function as its own standalone strategy). If the most it can do is shave a bit of costs here and there, it could only bring a sharpe 2 up to a sharpe 2.5, then it could be a long time (years) before you can even statistically significantly say it had produced any material impact on the portfolio. And in that case, a PM could just hire another alpha producer who would have a more direct impact on PNL anyway.

No. I'm not claiming I'm RennTech. I'm just saying that if you've got good alphas and then add something stupid like BTOP to it (perhaps deliberately but often inadvertently) that's going to hurt the portfolio.

Sharpe 2.5 in a statarb portfolio is doable with reasonable capacity if you know the temple secrets. If you throw in some human alpha and the corr is low, you can probably get it to 3.

There's actually a lot of edge in portfolio engineering. You need some good alphas to make it work, but a huge chunk of the edge out there is in the portfolio. There's a lot of naivete out there assuming it's pretty straightforward. Good for me, that creates some additional opportunities for edge.

In any case, most hedge funds peddle risk factors and rarely see Sharpes above the SPY.

I got to sit on both sides of it. I developed a couple really awesome alphas that went into the fund's signature book and developed a technique on the alpha front that the entire team adopted. But I enjoyed working on the portfolio more. There was just more complexity and the whole tennis match with the PM.

If I were a pure alpha dev, I'd be going a different route, but there's just so many firms that are leaving so much money on the table. If I can get a steady job being a portfolio engineer, and then get a percentage of the pnl on some of my ideas for alphas, I'm in good shape.

    • 3
    • 1
Dec 11, 2018

Would be surprised if you're not talking already, but Point72 and Schonfeld are both hunting ppl like you aggressively (Citadel to a lesser extent).

Dec 9, 2018

Great write up

Dec 10, 2018

Why is it called a "completion book"? Where can I read more about this?

It sounds like: the PM picks his 20 or so positions, sizes them, then hands book to quant. Quant figures factor exposures and finds the most efficient hedging portfolio, hence "completing" the book. Yeah?

Dec 10, 2018
slippery:

Why is it called a "completion book"? Where can I read more about this?

It sounds like: the PM picks his 20 or so positions, sizes them, then hands book to quant. Quant figures factor exposures and finds the most efficient hedging portfolio, hence "completing" the book. Yeah?

I cant give away any specific knowledge, but you're not gonna hedge it by hand. Any PM, certainly any risk manager, who took basic linear algebra can do that with a couple hedge stocks and RREFing the exposure matrix. Now, how we do it exactly? You will have to earn the answer through research.

The actual process is a little more involved. And the attribution is a nightmare, because eventually the hedge portfolio is pretty big and complicated and it all gets thrown into one pot for a bunch of PMs. The hedge portfolio is going to have its counter-attribution, but then it's going to have its specific returns as well. Who earns the profits or eats the losses on the nonsystematic returns? The PMs didnt choose these stocks. It's almost exactly like the toxic stuff you can't hedge on an exotics contract.

Theres like 20-30 other questions you have to answer setting these books up. And any one person can only remember about 10 of them at any given time.

    • 1
Dec 10, 2018
IlliniProgrammer:

And then you're going to need a quant with a spine and a strong sense of fairness. He's gonna have to help sort out all of the conflicts of interest and be as transparent as possible. And it's going to be tough to pull it off at a firm where the PMs are sharks and screaming Type-A personalities. That's just not how systematic quants work. But if there's a cultural fit, it might work.

I spoke with a couple different fundamental PMs looking to bring a quant on board for factor attribution as well as alpha research. I've closed my discussions with these PMs for basically this reason. They didn't seem to really understand or appreciate what I would bring to the table. Seemed like what they were looking for was a way to check the "we have a quant" box and and have a data person to check to see if a particular trade "looks good" based off of "the data".

    • 1
Dec 10, 2018
DeepLearning:

I spoke with a couple different fundamental PMs looking to bring a quant on board for factor attribution as well as alpha research. I've closed my discussions with these PMs for basically this reason. They didn't seem to really understand or appreciate what I would bring to the table. Seemed like what they were looking for was a way to check the "we have a quant" box and and have a data person to check to see if a particular trade "looks good" based off of "the data".

??? If the quant had insight about whether the trade looked good, he'd turn it into an alpha and get a percentage of the attribution. Like, I can do that for you, and it'll earn you a few basis points, but can I also license my alphas to a third party lol?

Still think there are some COOs and CEOs out there who want to bring the moneyball/sabremetrics approach to their firm if nothing else-- and it does make sense. But on a bad day, COOs can be like the firm's internal McKinsey. They can do a lot of stuff that seems to make sense for the business but pisses everyone off. I've seen it before at two different jobs.

So I need to find a firm where there is legitimate pain for most of the fundamental people-- where they realize they really do need a quant.

    • 1
Dec 10, 2018

exactly lol

    • 1
Dec 11, 2018

So.... look, I'm probably one of the most outspoken people on this forum in favor of the market-neutral product.... my assumption is/was that etf's changed the game and that now that lp's could gain market/beta exposure in an easily accessible, cheap, and liquid product that they would not pay 2 and 20 for such exposure.... I also largely believed that in 10 years that the factor-neutral model will be far more prevalent although it seems that smart beta etf's have not proven their viability as well as their "dumb beta" peers

So I understand your approach/offering and I agree that it is far more intellectually honest than a lot of what is out there.... But the longer I'm in the industry, I have to ask: do LP's really give a fuck? Look at Skye Global Management started by a 28 year old, runs $400mm, and has 40%+ of its allocation in MSFT... I know that is just one example but many other examples come to mind and I'm sure you know of them as well

yeah there are all these articles about hedge funds dying but it seems like as long as you still put up performance, lp's don't really care about attribution... are they really going to place more money with firm A that generates 10% but has marketing that shows that they have almost fully hedged out numerous factor exposures or with firm B that generates 20% return and runs net long?

please prove that I'm wrong... starting to have an existential crisis about my chosen path in the industry

    • 3
Dec 11, 2018
ElliotWaveSurfer:

So.... look, I'm probably one of the most outspoken people on this forum in favor of the market-neutral product.... my assumption is/was that etf's changed the game and that now that lp's could gain market/beta exposure in an easily accessible, cheap, and liquid product that they would not pay 2 and 20 for such exposure.... I also largely believed that in 10 years that the factor-neutral model will be far more prevalent although it seems that smart beta etf's have not proven their viability as well as their "dumb beta" peers

So I understand your approach/offering and I agree that it is far more intellectually honest than a lot of what is out there.... But the longer I'm in the industry, I have to ask: do LP's really give a fuck? Look at Skye Global Management started by a 28 year old, runs $400mm, and has 40%+ of its allocation in MSFT... I know that is just one example but many other examples come to mind and I'm sure you know of them as well

yeah there are all these articles about hedge funds dying but it seems like as long as you still put up performance, lp's don't really care about attribution... are they really going to place more money with firm A that generates 10% but has marketing that shows that they have almost fully hedged out numerous factor exposures or with firm B that generates 20% return and runs net long?

please prove that I'm wrong... starting to have an existential crisis about my chosen path in the industry

So, 15% of $400 mm is $60mm in returns, and not every fund can negotiate 2+20%, so 10-20% of 10-20% of $400mm isn't necessarily a mind-blowing number. Sometimes a good quant PM can negotiate better with certain funds than certain other funds can negotiate with their investors.

Money is important, but I personally get more utility out of earning less money and knowing what I'm doing than I do from earning more money and not having a clue. And there's a lot of headaches to running a fund that I think a lot of people don't want to deal with. I can't imagine how much accounting and custody headaches there are-- or from the fact that you've got a huge target on your back from hackers and other bad actors. For a quant, building a backtesting platform-- and getting the accounting accurate down to basis points (because this is sometimes what we're working with)-- sounds like a lot of miserable work, too.

Outside of work, I don't need fancy cars or big homes. Letting everyone know that I'm rich and keeping score has never been on my agenda. I need shipwrecks to discover on Lake Michigan, and a rebreather or Trimix to dive them with. I need a few weekends a year at the track, but maintaining a Yamaha R6 isn't as expensive as you'd think. My one expensive taste is flying, but that's more of a challenge on the skills and judgment front than it is expensive. (Perhaps one day the cost will quintuple on me and involve formation aerobatics at Oshkosh, but we'll get there when we get there)

Diving isn't a poor man's sport. But it isn't a rich man's sport. Even technical stuff. This is a shot I took at 150 feet in Lake Michigan of an almost perfectly preserved shipwreck. But I had to go into decompression to get there. People who don't care about competence or staying within their skillset might earn more money by going high vol, but they can't safely get these experiences. They might be able to afford the ticket on SpaceX, but they're going to be a passenger, not the pilot.

So... some 28 year old kid is running $400mm. Is he creating value for his investors? More importantly... does he know what he's doing? Wouldn't it be better to earn 5% or 10% of what he's making (most utility curves bend logarithmically at the higher levels as you run out of stuff to spend things on, so you're honestly pretty close) and actually know what you're doing-- to actually be building something, discovering stuff, being on the cutting edge?

I guess I can't break the illusion for you, but I'd much rather be me than a 28 year old kid with $400mm AUM and no idea what to do with it. I'm really grateful for the life that I do have, and I wouldn't trade flying, diving, or motorcycles to add a zero to my income. And I think, if you think about it, there's stuff that people who know their limitations have that other people don't.

    • 5
    • 2
Dec 11, 2018

Personally, I think the accounting and custody headaches are overblown and I've anecdotally seen most first-time founders shuttle it over to someone else on their team (although they definitely get annoyed at even the little amount of oversight they have to do regarding such issues)... once/if they can scale though, such things should be able to be competently handled by 1 operations analyst... this is probably different for a quant fund but I don't know much about that world

First time I have heard of hackers as a threat to a non-activist hedge fund manager but maybe I'm just unaware of that

To your very last point - I actually completely agree with that... I would not ever want to trade places with Ken Griffin or Elon Musk... for all their money, success, and accomplishments - they seem pretty unhappy (I think this is akin to what you are referring to but maybe not)

And I have to say that while I have never been diving, that is a pretty fucking cool picture. Thank you for your thoughtful post. I really appreciate the time you took to write it. I am not sure if I am fully sold on your answer but think maybe there is something in your answer that might apply to me.

I am young (definitely far younger than you and a lot of certified users on this forum but probably not as young as some users who are at a similar career stage as me) and still at the point where I'm figuring out balance in my life. Spent most of my formative years hustling to get into some sort of a coveted public markets related role (not to say I didn't enjoy college... if anything partying so hard is what made it take longer to get to where I'm at haha but those times are over) and am about a couple of years into such a role. I have recently (over the last 6 months) started feeling that there was something missing in my life and am still unsure of what it is. Part of me has considered that it might be that I need to look for another role in the industry but while there are still aspects of my job that I wish I could change (autonomy/choice of work projects, commute), it seems to me that I am in a far better seat than most people my age in hf world (if you factor in aspects other than pay such as partner-track, upside potential, etc.) and that maybe all it'll take is for me to be patient for 2 or 3 years. But reminding myself that I am luckier than the vast majority of people in the financial services industry, most of the people in the HF world my age (definitely better off than all the people getting cut at Baly), and 99.999% of the world doesn't seem to help.

After reading your post, it strikes me that (now that I'm finally in the career path that I've been aiming for since I was in HS) it might just be that I'm at the point where I need to find the balance between a) my desire to constantly be striving for something higher in my chosen industry and b) shaping my life to be content with where I am/the present.

So to someone who seems to have figured that out - kudos to you.

    • 4
Dec 11, 2018

I agree with you both I think both paths are fine.

Very few hedge funds run a focused booked like that. They did 30 years ago. It's why returns are down.

But steady pension fund returns work better your way.

Also much tougher to manage risks on a focused book today than before. 20 years ago you would have to worry about a huge drawdown if you missed a financial crisis or were buying the highs in internet stocks. Now trades skip stopping out and go straight to bankruptcy prices quite often. We've have had at least three trades like that this year.

Also it's not about money. The thrill is being in the trade. The money just flows.

Also I've ran 40% of an account I've managed in valeant pharmaceuticals purchased right when ackman puked it. But takes some balls.

Array
    • 1
Dec 11, 2018

Bro... are you like 60?

Dec 11, 2018
traderlife:

I agree with you both I think both paths are fine.

Very few hedge funds run a focused booked like that. They did 30 years ago. It's why returns are down.

But steady pension fund returns work better your way.

Also much tougher to manage risks on a focused book today than before. 20 years ago you would have to worry about a huge drawdown if you missed a financial crisis or were buying the highs in internet stocks. Now trades skip stopping out and go straight to bankruptcy prices quite often. We've have had at least three trades like that this year.

Also it's not about money. The thrill is being in the trade. The money just flows.

Also I've ran 40% of an account I've managed in valeant pharmaceuticals purchased right when ackman puked it. But takes some balls.

Well it's weird in systematic. We're following the scientific process, and that creates a genuine confidence. But we also reject 3-4 strategy ideas we test for every idea we adopt.

And again it's a continuum. If you've got a 1 Sharpe book, my risk factors are your alphas. If you're 2Sig and running 3-3.5 Sharpe or whatever, some of the stuff I call alpha at 2-2.5, they probably call risk. But they're also turning away capital. Heck at 2-2.5 Sharpe, you're going to be turning away capital too.

Me personally I'm looking for experienced market participants with good ideas, not capital. If you have a high quality book, the money follows naturally.

    • 2
Dec 11, 2018

double post

    • 3
Dec 11, 2018

Hearing Surveyor just cut some more teams today.

    • 1
Dec 11, 2018

Going to be interesting how Ken changes his business now. He's the best manager in the business. Completely flipped his business after 2008 from a better financially structured LTCM type fund with a lot of credit spreads to a fairly sophisticated trading firm.

My guess he ends this year up 2%. Last year 13%. There was a London macro fund that kicked out the low vol pension money and converted to a $2 billion family fund and started putting up 50% a year returns.

He's already got 8 billion so he doesn't need the aum. And making 2% on your money isn't that good.

Array
Dec 11, 2018
arslonga:

Hearing Surveyor just cut some more teams today.

A lot of blowouts still to come. Dec off to terrible start across platforms.

Dec 11, 2018

Tax loss selling too. But have they really not liquidated yet or decided to just deal with a teams loss and hope?

Every asset I look at is already pricing in a recession next year. Which from a monetary policy perspective is a possible. Rate hikes and qe tightening basically monetary policy acts with a lag. Industrials tech and banks at 8 pe are already pricing in something bad. And we just created 200k jobs. I have some doubts more is to come though it definitely feels like it. I believe a pain thesis but also believe reality andnmarket are stretched right now.

Array
Dec 13, 2018

Jabre Capital shutdown.

Are there any star traders left?

Einhorn wouldn't be surprised if he becomes a family office.

Trian Partners - balls deep in GE heard they had some redemptions.

Bbl supposedly smoked. Was suppose to be the next Andy hall. Who died last year.

Literally feels like every star trader from a decade ago is dead.

High Hendry dead. Last year. Would have been crushed this year as his call was macro is dead and he saw no reason not to be levered long stocks.

Will be interesting to see who else ends up dead in the next month.

My google searches in Bridgewater appears they haven't made more than fixed income compounded recently. Was up 1% end of October so that will be interesting.

Who will CNBC be able to put on the air as a market god? Tepper seems alive.

Only arena that isn't killing their stars seems to be fixed income. Gundlach alive.

Array
Dec 13, 2018

I think all the major players in distressed are doing fine, as well as deep value guys who always sit a bunch of capital on the sidelines (Klarman and Marks).

Dec 14, 2018

Distress guys are are struggling a little. Not enough distressed assets. I believe a lot are playing in what they call illiquids - basically finding a way to create an asset with 10-13% returns. But not enough fallen angels to feed them.

The deep value guys are doing ok. No idea on returns history as it's tough to find. Only think I see is high single digits for Klarman in 2016.

Issue for baupost is they built their returns on having a business cycle. Hold lots of cash in strong market and buy when things go bad. I personally don't believe in recessions happening again since the policy frameworks are in place to prevent them. Less of a wild idea than people think Australia's 30 years since a recession,

Array
Dec 14, 2018

I am aware of since-inception figures for both funds, but I wouldn't be surprised if there were single-digits the past few years. Oaktree especially feeds on cycles, and to some extent so does Baupost, as you said. Could you define what you mean by illiquids? I heard, for instance, that BlueCrest posted its recent results by buying CLOs, or similar products.

Dec 14, 2018

So a speach by a guy at carval. They have partnerships with Spanish banks funding some real estate. Some deals with Italian banks doing something similar funding bad mortgages. Something like that funding local projects in China. Not much actual traditional distress to play in. I believe they did some of the steinhoff debt that blew up but there's not enough of those situations for the distressed guys.

Honestly for hedge funds anything before 2010 doesn't matter. Only performance since then. There returns certainly get juiced by having recessions. And should underperform if the economy is more stable.

The main reason we've had recessions since 1980 was due to coming off of high inflation. Every recession the fed over tightened into and we had a recession that then knocked inflation down 2% for the next cycle.

The fed shouldn't have a desire to knock inflation down now so we shouldn't have those recessions. Anytime the economy starts to show a little weakness like right now they shouldn't have a desire to hike too much.

Array
Dec 14, 2018
Dec 14, 2018
Array
Dec 14, 2018
Dec 14, 2018
Array
Dec 14, 2018
Dec 14, 2018
Array
Dec 13, 2018
Dec 14, 2018
Array