JPMs Friday statement is the latest piece of doom. I'm still long on the industry. I'm convinced banks are too smart & FICC is too important to profits: things will bounce back (albeit never to 2007 levels).
At what point should I get nervous that things might be depressed for a long long time? Specifically interested in credit (to a lesser extent rates).
also interested
extremely interested in this!!!
my take is that if you are 19 , then you have nothing to worry about!! if you are 27 just our of B school looking for FICC- then ma be reconsider.. you might be too old to trade when it picks up
but wpuld want to know from senior peeps
Hey glen, I'm in the same boat as you and am also interested in this. I'm thinking that headcount might keep trending lower until it is at a level that is appropriate for the reduced revenues. Also, I've heard that the big guys, e.g. GS, JPM, Citi, etc. will come out ahead as other smaller player with smaller franchises exit, a la UBS.
Today's article on GS in Bloomberg: at the peak, the gap between Securities and IBD revenues was about $15b (I'm guessing in 2009). That gap is currently $1b. And it isn't because IBD has made a ton more money.
Well you should already be "afraid" for several reasons
1) Capital charges are making many banks get out of fixed income 2) Trace has started the path towards "equities-izing" fixed income... people always think it will take longer than t does 3) rates will only go up, making it harder to issue, harder for LBOs to get done, and prices of bonds to go down (which all DIRECTLY affect the profitability of the desk 4) The economy is not bouncing back as much as even the most bullish of bulls would like it to... the macro environment matters.
3 and 4 are contradictory. 3, in fact, is incorrect. Higher rates are good for the profitability of bank FI franchises. There sure is no positive correlation between bond prices and desk profitability. In fact, if anything, you could argue the exact opposite.
In terms of the original question, if you were expecting that the "free lunch" environment would continue ad infinitum, you should be worried, yes.
Basically what Martin said (as always). The days where you were able to do a trade where you just went and hedged immediately through broker screens are over. So are the days of being able to do any trade that made money without regarding its return on balance sheet and rwa. But there will always be fixed income. Number 3 in the previous post is idiotic. It's the exact opposite, which is why all FICC desks are struggling now.
Hi all,
I have an offer in credit flow trading (corporate bonds and cds) and another one in rates trading (linear products like IR swaps, FRA, fx swaps)...These two offers are from the same bank..The bank is good in both asset classes in terms of revenues.....What would you choose ?
Which asset class is more likely to be negatively impacted by structural changes in the market (balance sheet shrinking, electronification of fixed income markets etc)
Comments from people in the business would be highly appreciated !
these are full time analyst offers by the way...
3) is not idiotic. Think about it not in theory but reality. Banks obviously have inventory. Long positions will go down unless you have a very light book. Mark to market matters and you can always say the yield to maturity/worst will play out because the volatility matters. Yes vol is good for flow, but not necessarily for positions. Plus the market for HY at least is getting less liquid. On top of that, you can't just be short bonds because the carry hurts you.
I agree with CreditAnalyst85
Why do you agree? I am curious...
Erm, you're not making sense, I am sorry...
Are you suggesting that, in this day and age, an average FI franchise makes money on "positions" rather than flow? Even supposing that were the case, why would a desk necessarily be long? Moreover, higher rates generally imply steeper curves, which, in turn, implies more risk premia. Risk premia translates into higher vol and more rolldown. Both of these things are drivers of PNL. And yes, it makes it more painful to be short, but guess what? For your shorts, higher volatility will be a pretty good thing. Finally, I don't get your point about HY.
I don't wanna sound dismissive and/or arrogant, but I am getting a sense that you haven't really thought your assertions through carefully. Either that or you don't have enough experience to make these assertions.
I still don't agree with you. In reality banks have as much of a long inventory as a short inventory. In fact, when it comes to cash my intuition tells me very few dealers are long. Have you ever tried to buy a corporate bond in size? If you try to get hold of something like 20 bucks you´ll see that it´s a fundamentally skewed market (specially this days). I do agree that vol is not good for positions, you always want to minimize your daily PnL vol in a dealer desk, but we don't really hold inventory for that long. We make money out of clients trading around that vol, and in fact if you look at it in reality like you said when there is high vol there is little need for prop positions/inventory so you actually see a more stable PnL. If you plan to make money by holding an outright long position you will be out of business pretty quickly, no bank will let you do this nowadays. Also, you don't necessarily need to be losing carry to short the market, you can always position your book to be short (or trade like a short) with little to no carry. I don't think you are analyzing the relationship between roll down, carry and rising rates properly like Martin pointed out. And I really disagree with your statement that HY is less liquid although I guess it depends what you compare it with.
to Martinghoul : forgot to mention that I only "partially" agree with creditanalyst85
There are two things I am worried concerning the profitability of credit trading desks at sell side firms:
1) With the new regulation, banks cannot act anymore as the "middleman" like before in the cash bond markets...because that business is too RWA intensive...so de-risking and deleveraging of banks means lower ability to make markets and therefore less revenues for market making desks....this is why the liquidity has been drying up in the cash markets...that's also why we have been seeing initiatives by even some buy side firms to create limit orders platforms to trade bonds (like stock exchanges)...if this solution encounters success (which I am not sure because of the structural differences between cash equities and bonds), banks would be running a real agency model...giving only "execution" and "market access/platform access" to clients...As an aspiring trader, I don't see any real trading "skill" I could learn in that type of business.... 2) the structured credit business has not really picked-up since 08, and, in turn, cds volumes today are half of what they were at their pick....
I have received offers in credit trading and rates trading...I was going to choose credit over rates but now I am very worried about credit ...I have to decide before next Wednesday...
I would appreciate any comments from people with views about this subject !
I think it depends on whether you're talking credit or rates desk. Creditanalyst85 could be right if he means credit, and martinghoul/maximus could also be right if they mean rates. The guy that posted the thesis...tldr
my view is rising rates are net negative for credit desks. As rates rise you should see a rotation out of spread products because there's not as much need to reach for yield. Markets gap more often on the downside than on the upside, so a sell off in spread product will be quick and vicious. If dealers everywhere get hit and can't cross they'll eat the mark to market as the sell off continues. Now I agree with martinghoul/maximus in that vol is good for dealer desks, but only insofar as you have a) the liquidity/market depth to get out of your client imposed positions quickly, and b) you can charge enough bid offer to cover (a). I don't think those conditions are present in credit desks
now if we're talking rates desks I'd expect profitability to go up. The front end being anchored all this time has taken away a lot of vol and that's not good for dealer business. As stuff finally starts to happen in rates there'll be more to do, vol should pick up, volumes should pick up, and since the liquidity is there, it should be a net positive for rates desks
just my 2c...
Think the outlook for rates trading and credit trading are two different things.
And what's your view about the outlook of rates trading vs credit trading mrb87 ?
Comte... Be very careful about the approach you are taking to choosing a desk.
I think kids entering trading always look to the hot product and don't really understand what to pick for a CAREER. I understand the fear of having a bad year on the desk, especially when getting paid is a big deal in this biz.
I suggest not picking an area in a bank that is downsizing or disappearing. For example, commodities in Barcap or credit at UBS. I doubt they'd take you anyway.
Then figure out what interests you and where your skills lie. Think about this. You'll be in an analyst program for two years, possibly rotating in more than one desk. Either way, your salary and any bonuses are already set, and they'll only go down if the bank of doing poorly overall and they make cuts to the HR budget... That's right. HR pays you. By the time your 2 year program is done, it'll be mid-2016. A lot of the pain from higher rates may have passed. Maybe not, but at the end of the day, the skills you built over the last two years will be what will likely dictate the trajectory of your career. You should know S&T ends up being very pigeon-holey. If you have to choose, where would you prefer to be pigeon holed? More importantly, what is a good choice for a 20 year career?
1) credit and rates are different animals...if we get higher rates it will almost definitely help the sell-side rates business, whereas credit is less certain.
2) you have no edge in forecasting which business will be better 5 years forward...the banks themselves spend plenty of time and money guessing and they usually get it wrong. So pick whichever desk u are most interested in the product, which people you like better,etc as opposed to trying to guess where the market is going.
3) that said, if I had to make the choice i would take credit if i wanted to make a career on the sell-side and rates if i wanted to move on and trade other products on the buyside...i feel like rate skills are more transferable to to other stuff (especially FX) whereas credit is more profitable for market making.
Exactly. And credit will get a triple-whammy from Volcker Rule and Basel III. That business will start to migrate more towards brokers and large institutional investors setting up market-making businesses (e.g. BlackRock, Fidelity).
thanks for your thoughts BondArb and CreditAnalyst... BondArb: why 3) ? could you develop a bit more ?
i think mostly abut macro which is what I do....if you have an educated view on rates it can inform cross-asste views pretty easily. ie "i think the front-end of XYZ country is very rich and higher short rates are well correlagted to cry strength so i might buy the currency"...or similar idea with financial conditions with regards to equities or commidties. Credit ideas such as "i like GM bonds vs Ford bonds" etc etc seem more specific to that market at least to me.
@Bondarb - what are your thoughts on the level of conviction one can get in macro vs. fundamental investing? The macro relationships you are describing (rates' impact on FX, commodities, and equities) seem rather tenuous, idiosyncratic, flow-driven, and to some extent, like you're trying to guess what the rest of the market will guess.
Whereas a fundamental credit investor who has done their homework on GM vs. Ford has (what I think is) a higher conviction thesis that is based on logical fundamental reasons. As a self-described macro thinker have you ever been concerned about this issue?
I have made my decision. I decided to choose high yield credit trading !
Good choice comte. Hy is the way to go. More spread and as rates move higher, buyers will be more active.
I can have very high levels of conviction on macro trades and there have been some throughout my career that were absurdly good fundamentally driven market anomalies...housing/credit in 2007, global rates priced for a v-shaped recovery in 2009-2010, eurozone crisis (both into it and out of it), etc. However a lot of macro involves using the liquidity of the market to manage risk in a way that creates a return profile that usually isnt available in less liquid asset classes...basically the old "let winners run, cut losers"/trading skills-type stuff. So yes there is much more to macro (when it is done right) then just saying "i hate the aussie economy for XYZ reason so lets sell AUDUSD" and stuff like that.
+1
but these high conviction directional trades only come about once every 2 years, so what do you do in the interim? when the market is whipsawing and there's no clear trade...i feel like that is when people start doing the "i hate X economy so sell FX" thing you mentioned...with results that aren't great
Many macro products (like FX and rates) trade within a narrow band, with the occasional tail event driving the product out of the normal band. Also, I am having trouble understanding how this "trading skill" (managing risk, cutting losers, scaling up on winners) justifies/enhances additional returns. On a random line, If you scale up on your gains, and scale down on your losers, statistically, you will still break even. Unless you had some kind of informational edge (like you would as a market maker).
The equity market seems to have a natural upward direction (due to inflation, due to more longs than shorts, less tied to supply/demand swings) and seem to have more researchable/predictable events to invest around (earnings, M&A, industry megatrends). What's more, pair trading seems more intuitive, as you can compare similar companies.
After reading so many articles/statistics about hedgefunds not being able to beat indices, without offering much downside protection during crisis, I used to wonder if the top funds are actually consistently putting out strong returns because of some kind of repeatable, relatively consistent strategy or because of luck and randomness.
After spending a year in a macro trading desk, and a year in banking (recruiting for HF/PE), I am nowhere near an expert, so I would love to hear others' take on this, but the consistency/repeatability of fundamental hedge fund results was more intuitive, while making correct macro calls seemed more flukey/hard to get right consistently.
With micro, there are so many small companies with debt and equity that it seems easier to get an informational edge through research/expert networks. Also, timing/execution seems to be easier: someone who liked the Netflix story pretty much had an uninterrupted stream of capital gains.
On the other hand, macro products (especially FX and rates), everyone has the same news/stories it's hard to get any kind of informational edge. Not to mention, a larger portion of investors in the fundamental markets (equities and bonds) are not very sophisticated (mom and pop, passive mutual funds, index funds), while the proportion of sophisticated investors/traders in macro markets seems much higher (mom and pop do not often dabble in FX, there are less passive indices and mutual funds). Also, timing and execution seems tricky, and often times, you call the direction right, but you can't stomach enough pain to wait for your prediction to actually come true. If the housing crisis took a few more months to ramp up, perhaps Paulson would not have been able to hold on this short position. With George Soros' breaking of the London pound, a stubborn government could have easily thwarted his efforts.
TLDR: it seems like macro (especially FX and rates where you are trying to predict the actions of governments and policy makers), returns seem more fickle and less consistent, while with micro, returns seem more predictable and strategies consistent because you can deal with smaller companies, find information edges, and execute easier. Trading/speculation vs. investing.
I disagree with your conclusion, but this opens up some interesting discussion points on the fundamental differences between equity L/S and macro. Success in equities is all about uncovering as much information as possible. I'm not referring to MNPI (material non-public information), but rather little scraps here and there that add up to give you a better understanding of a company. This is why being an equity analyst is somewhat akin to being a detective - doing cold calls, visiting stores, questioning management, interviewing former employees, etc. Based on your work, you can build relatively high levels of conviction in what something is worth. This affects how risk is managed. Say an equity L/S manager thinks MAR is worth $70 per share based on a few different methodologies. The worst scenario valuation is $45 even if the thesis is dead wrong. A small position is initiated at $55, the stock proceeds to trade down to $50 due to newsflow that does not affect the core thesis. That manager is likely doubling down at $50, since the upside / downside just improved to 4:1 from 1.5:1 at initiation, if he continues to have conviction in the eventual valuation. I've never seen an equity manager that uses stops before.
The above would rarely (if never) happen in macro. Macro managers trade with a tight stop - say someone shorting the NQ (Nasdaq) contract today at 3725 because they were becoming negative on risk appetite would say that above 3730 was the prior high, so if it trades above that they are wrong, placing a stop at 3735 and defining 3700 or below as their target. If they are wrong, they will lick their wounds and attempt the trade again later when a more favorable setup appears. In macro, you never have as much conviction over how much something is really worth. What is the right value for the EURUSD? There are models based on interest rate differentials and other economic datapoints, but you have much less information than you would for a single company.
Also, in equities, basically all of the participants in the market are speculative. Everyone is there looking to generate a return. In macro products, you have many non-speculative participants (i.e. the farmer hedging his corn crop, central banks intervening in FX markets, etc) that may have an agenda that is totally disconnected from the "fundamentals". So macro is more about listening to what the market is telling you and being nimble when it tells you that you are wrong, versus equities where you draw your line in the sand and defend it. That is why equity managers who cross over into macro ("macro tourists") try to play macro trades as if they were equities with poor results, such as Paulson with the gold trade, lots of guys shorting treasuries, etc.
As you said, in macro almost everyone has the same information. The game is in interpreting it better. To me, this is more artistic and fun than hustling to get more information over the next guy. Perhaps this makes macro more difficult, but as @Bondarb said, I think there are certain personality types that would do better in each style. I will say this - it does feel like equities are more of a grind where you can just throw people into a process, whereas macro requires some level of personal intuition (whether born or bred) that you can't just replicate across the floor. Curious to get @Bondarb's views on this.
nice comment - ty
Yes, macro is very tough... 'Nuff said.
ambiton 56- more longs than shorts?? seriously
Yes. I am comparing equities to FX, commodity futures, euro dollars and cds, where there have to be a buyer and seller on both sides. Intuitively, this seems to make those markers more volatile, and ultimately a zero sum game.
Yes macro is tuff no debate here...but so is L/S equity which has broadly gotten killed this year regardless of how intuitive" it may be. But it is all-out your personality, what suits you best, and of course where u happen to land a job. If equity long/short seems like it makes the most sense to you, then pursue that. Steven Cohen is a billionaire. So is Stan Druckenmiller. So I guess both strategies can work.
I was at a presentation last year where an allocator talked about how rare it is to find L/S managers that consistently beat the market. While he was talking his slide was showing picture of a unicorn. I thought that was very clever of him. (For those who don't speak Deutsch, unicorn in German is einhorn).
Druckenmiller also shut down his fund because he said he couldn't continue to deliver the same returns in this environment...
I think what @ambition56 is getting at is, there is a logical reason for why fundamental value investing with a margin of safety should deliver superior risk-adjusted returns over the long-run. This is not the case for macro.
Since luck is a factor in track records, it doesn't seem appropriate to judge the validity of a strategy solely based on the results. Here's the difference - even if you leave the track records aside, the fundamental investing process can stand on its own and be defended on a theoretical basis. But the only real argument macro has going for it is that it has worked for some people at some points in the past, that some macro traders have had track records of success (i.e. validation by results).
I have no dog in the fight; would be glad to hear if/why you macro guys think this is BS
this is a rly interesting discussion about macro, im definitely not qualified to talk about either strategy in depth but i think at first glance micro investing seems more defensible.
but maybe that is also partly an illusion, ex. bill ackman and herbalife.
I think I know what y'all are trying to get at and I have quite a bit of sympathy with the view that macro is, generally, a lot tougher by design. I also agree that the track records of the macro greats don't mean that much, in light of the survivorship bias as well as the possibility that these returns were a result of "inside" info. All of this has to do with one of the most fundamental principles of financial mkts, Specifically, that only two ways of making money exist and everything people do is one or the other or some sort of a blend.
However, I would hesitate to make any categorical statement, such as "macro doesn't work" or anything of that sort. Macro is just difficult and the only way it works, at least for me, is if/when the implementation is right.
Not claiming to be an expert here (one year macro trading, one year banking, PE in a year) and not saying that macro can't generate returns, this is just my sense, but "listening to what the market is telling you" sounds like alchemy compared to research and analyzing the fundamental or at least relative value of a stock based on discounted future cash flows. And with activist funds, the publicity and attention alone generates (usually) returns. I'm not saying rosy valuations are justified, but everyone is a winner until the bubble pops and you're the one left holding the stock.
Also, this could be completely ridiculous, but in equities, yes everyone is a speculator, but also, most positions are long, so in a rising market, everyone wins. With macro, it's a zero sum game. Macro investing, unless you have some cult/crystal ball like insight into the world (and even Bridgewater struggles at times), it seems like your returns are derived from gaming the markets (trading ahead of the corporates), which seems like that would produce limited gains. It feels as if a macro trader/investor/speculator/whatever you want to call him can play the same game with a random number generator that ticks up and down and sideways, which doesn't seem very compelling to me.
Someone with more experience and knowledge in macro, please enlighten me. I am clearly biased here. I did leave macro trading for more fundamental investing after all. It felt any returns beyond gaming the markets was modern day alchemy. Interviewing for PE/pitching stocks for HFs, I looked at the fundamental building blocks of the business and industry trends and combined that analysis with cash flow models that narrowed down valuations to a range. This was grounded by LBO and comparables. Much easier to say company X is better than Y rather than saying company X is worth A. Silly analogy but much easier to say Sally is more attractive to Ashley rather than putting her on a 1 to 10 scale.
Soros did name his magnum opus "The Alchemy of Finance" after all. I can buy the argument that discretionary equity L/S is more scientific than discretionary macro. For instance, you can also point to the greater use of technicals in macro. That doesn't mean that it is any less valid. Macro is more of an art because you are combining fundamental research with market observations/feel, equity L/S is more of a process-driven grind. Our viewpoints are not that far apart. But I strongly disagree with your view that macro is just gaming the markets, while putting equities up on a pedestal. Since the prices of all assets in a free market are driven by incremental bidders and sellers, aside from holding fixed income to clip coupons, when we invest in an asset ultimately we are always trying to front run someone else. You say activist funds generate returns through publicity and attention - ultimately you are just front-running the guy who is willing to buy the stock at your target price. If anything, how is generating returns via CNBC announcements not the ultimate form of gaming the market?
Moderator, would it be productive to take this to a new thread regarding the merits of macro vs micro investing? I feel like we've ventured off from the original subject.
Ha, was just about to suggest to split up the thread. Anyways dang RBS and Citi announcements regarding revenue DOES NOT BODE WELL YO.
i have no opinion on whether macro is superior as a strategy...i know i have made money doing it and i continue to do so therefore i have no need to debate whether or not its "luck" although if its luck its been a nice run. I can well describe my process and why i feel i have been able to make money but who knows maybe i just have a hot hand at the craps table. The only thing i dispute is that value investing or equity long/shorti is any different in this regard...as long as all the info is public there is no magic to buying cheap assets...everyone knows they are cheap, and they may be cheap for a reason. And in fact epic blow-ups are much more common in equity-land then in macro due to the relative liquidity profiles of the two strategies.
This may be relevant to the earlier discussion about rates vs credit: http://www.bloomberg.com/news/2014-05-29/credit-trader-s-shift-to-rates…
i'm not bullish on the future of either (at sell-side shops). credit gets hit with higher capital charges but rates is going to become "electronified" more quickly
i really like the way @"slowdive" put it - certainly makes me think about fundamental investing in a different way. you are indeed still trying to front-run someone else, just on a much more stretched out time scale. also can't argue with you that fundamental investing is a grind (i personally find it painful) but i think having this structured approach/gameplan to investing can be attractive to some despite the extra work you have to put in vs. macro.
interesting article
How do you think the creation of a liquid exchange in corporate bonds (like in equities) would affect the credit flow trading desks at banks ???? (Assuming that the exchange does become very liquid despite all the obstacles it may find)
Corporate bonds wouldn't be as liquid even with a so called exchange. Someone has to be there to offer the bonds for you to buy them. Otherwise, they have to be sourced.
Some great info in this thread, definitely one of the better ones recently. Learning a lot.
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