Algorithmic Trading Gets Smarter After Quant Upset

Funny thing is when these things were doing so well earlier and I was putting them down saying that they had no right to be in this business and that eventually when you get a market that doesn't make since mathamatically or scientifically these guys will go belly up. Come on now im only 17 years old and could realize that this was going to lead to a disaster but do I feel sorry for these quant funds.......let me think........HELL NO! The market makes a fool out of 90% of the people who play its game. I know I have been fooled more than I would like to admit but trying to combine physics and highly complex math equations into the market and actually think it all ties together someway is down right ridiculus and anybody that thinks that should have there brain examined. Well ive vented my anger and frustration about these people back to the combine to harvest the rest of the soybean crop:)
 
Quote from smilingsynic:

Once every 100,000 years? LOL. If I weren't comfortable in my lounger, I'd be ROFLMAO.

Let's get real.

The NYSE opened in 1792, a little over 200 years ago. The history of financial markets doesn't go back much beyond that.

When was the first hedge fund established? Less than sixty years ago, I think, and A.W. Jones, the first hedge fund manager, wasn't much of a quant.

100,000 years ago Borg was knocking the heads of other cavemen with his club.

The ancient Greeks had a word for such arrogance (not Borg, but that of said clueless and much less sensible quant): hubris.

A hedge fund that bets against the hubris of "quant" hedge funds? Now THAT would be something. And I have the perfect name: the Icarus Fund, after Icarus, the mythological drowned in the sea because of his own hubris.

Like him, Mr David Vinier is all wet.
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The idea that last summer's credit crunch...
Was a 25 SD event... is idiotic.

These panics happen every 2-3 years...
Russian crisis in 1998...
Y2K panic December 1999...
Tech meltdown in 2001-2...
Energy meltdown in 2004...
Sub-prime real estate meltdown 2007.

Normal, common events...
The result of human nature meets modern financial markets.

Each of these was accompanied...
By the same, typical divergences from "historical norms"...
Like spread between AAA and Junk widens, etc, etc.

If you have been trading for > 10 years...
You should have seen credit crunch coming...
You should have avoided the obvious pitfalls...
And made a killing off the volatility last summer.

The mistakes made by the clowns at GS...
And most of the losing hedge funds...
Are worthy of a trader with < 5 years experience...
And the brass at GS all know it...
Thus the full court press Bullshit Offensive.

There is a fundamental problem with the Algo World:

It's immature...
With many large operations run by inexperienced traders...
Who rely too much on questionable risk analysis...
Or outright scam artists.

90% of the Hedge Funds in this world...
Are nothing more than "skimming operations"...
Just a NEW WAY for the Securities Business to take away your money.

Never forget that.
 
Quote from nazzdack:

Stuff that is expected to occur once every 100,000 years seems to happen once per decade.
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100,000 years?...haha...yeah right.

I just did some statistics on this myself. Using the SPY as a benchmark over the last 20 years, the standard deviation from one month's high to the previous month's low has a standard deviation of roughly 4.6%. Now the SPY moved about 12% to the August low. Using those statistics, there is roughly a 4.5% probability of that happening in any given month.

That's hardly "once every 100,000 years" :D .
 
Oh, also, that movement was more like just under 3 standard deviations. I don't know where the hell those guys at the fund got "25 standard deviations" from or what they could possibly be comparing that against. But what they aren't comparing it against is the actual market volatility.
 
Quote from QuantPlus:
The idea that last summer's credit crunch...
Was a 25 SD event... is idiotic.

These panics happen every 2-3 years...
Russian crisis in 1998...
Y2K panic December 1999...
Tech meltdown in 2001-2...
Energy meltdown in 2004...
Sub-prime real estate meltdown 2007.
More...
Your list above makes it look like this year's equity L/S meltdown had a historic parallel. I do not agree. "Those" panics did not have the same effects on a tick by tick basis on all asset classes as the 2007 one had. Every respective crisis affects each fundamentally different strategy in a different way. If one strategy works well in Panic A it holds no deterministic value to forecast how it will perform during panic B. E.g. Long/Short equity wasn't affected as much in 2001/2002 or 2004 as it was affected in 2007.

I am sure guys like Renaissance and Tykhe backtested their long/short equity strategies with perfectly correct EOD data (probably even with intraday data if available) all the way back into the 70s. What they could not backtest (and this is IMO that leaves them looking like idiots now) was what happens to liquidity when billions of leveraged dollars in the exact same stocks of multi-factor-arbitrage long/short equity positions receive margin calls and get liquidated. Just because a simultaneous long/short equity panic unwinding hasn't happened before (Not in 1998, in 2001, in 2004 etc. etc.) doesn't mean it is statistically "improbable" or a 25 sigma STDEV move. That's complete BS because events in financial markets are not normally distributed, plain and simple. All these multifactor quants should have stress-tested (beyond backtesting) their systems before leveraging up their investor's money five times.
 
Makloda, it´s always a pleasure to read substantiate observations and you raised some decisive issues !

I want to quote RENTEC´s Jim Simmons during the International Association of Financial Engineers annual conference, this year titled "From Quant to Riches," in New York ( published at www.hedgeworld.com ) :

"Statistic predictor signals erode over the next several years; it can be five years or 10 years. You have to keep coming up with new things because the market is against us. If you don't keep getting better, you're going to do worse." Mr. Simons said that his models change weekly.

Comment by the author of the article :

Two of Mr. Simons' other interesting personality traits, ones that are necessary to be a master trader, are his adaptability and flexibility.

Conclusion :
Quants are back. They have adapted their strategies and most probably have worked pretty hard on their risk management systems...

Future results will proove.
 
Makloda, it´s always a pleasure to read substantiate observations and you raised some decisive issues !

I want to quote RENTEC´s Jim Simmons during the International Association of Financial Engineers annual conference, this year titled "From Quant to Riches," in New York ( published at www.hedgeworld.com ) :

"Statistic predictor signals erode over the next several years; it can be five years or 10 years. You have to keep coming up with new things because the market is against us. If you don't keep getting better, you're going to do worse." Mr. Simons said that his models change weekly.

Comment by the author of the article :

Two of Mr. Simons' other interesting personality traits, ones that are necessary to be a master trader, are his adaptability and flexibility.

Conclusion :
Quants are back. They have adapted their strategies and most probably have worked pretty hard on their risk management systems...

Future results will proove.
 
Quote from AK100:

Many of these guys aren't as stupid as everyone thinks because they know their models are crap in times of panic.

Most of that talk is pure marketing so as to give the investors the impression that they're employing pros/people who really know what they're doing.

In the meantime the fund managers know that when the crap hits the fan it's likely that their funds will take big hits but they hope that first the markets will trade normally so they can rape the fund of fees and pay themselves some big $.

So with the Goldman boys how much have they personally paid themselves over the last 5 years and can investors get any of it back? No chance.

Heads they win, tails they don't lose (I just don't make a lot of money via performance related bonuses).
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kudos. this is exactly what paul volcker said in a recent speech although a little bit more diplomatically.
 
Quote from makloda:

Your list above makes it look like this year's equity L/S meltdown had a historic parallel. I do not agree. "Those" panics did not have the same effects on a tick by tick basis on all asset classes as the 2007 one had. Every respective crisis affects each fundamentally different strategy in a different way. If one strategy works well in Panic A it holds no deterministic value to forecast how it will perform during panic B. E.g. Long/Short equity wasn't affected as much in 2001/2002 or 2004 as it was affected in 2007.

I am sure guys like Renaissance and Tykhe backtested their long/short equity strategies with perfectly correct EOD data (probably even with intraday data if available) all the way back into the 70s. What they could not backtest (and this is IMO that leaves them looking like idiots now) was what happens to liquidity when billions of leveraged dollars in the exact same stocks of multi-factor-arbitrage long/short equity positions receive margin calls and get liquidated. Just because a simultaneous long/short equity panic unwinding hasn't happened before (Not in 1998, in 2001, in 2004 etc. etc.) doesn't mean it is statistically "improbable" or a 25 sigma STDEV move. That's complete BS because events in financial markets are not normally distributed, plain and simple. All these multifactor quants should have stress-tested (beyond backtesting) their systems before leveraging up their investor's money five times.
More...

what you writes sounds very erudite except for the fact that you have previously written that a buy and hold strategy cannot be compared to the performance of hedge funds because investors in hedge fund were willing to accept lesser returns if the range of returns in any given time frame was less than that of a buy and hold strategy.

the hedge funds have failed their mission to reduce volatility of returns.
this is not surprising. the herd is created when an strategy becomes the prevalent way of doing things. once something becomes the prevalent wisdom there is no exit large enough if a substantial number of participants decide it is time to exit. the result is increased volatility not lessened volatility.the herd always loses money especially when large fees to wall street are added to market risk resulting from being part of the herd.

as to stress testing why should wall street bother. it is about making gargantuan bucks off the fees. if you are successful in fooling enough people to send you their assets you live of the 2 per cent of the assets under management . depending on the amount of greed of the manager you take outsized risks because you don't share in the losses. if you get an outsized return for a short period of time the manager is rewarded for a lifetime.
 
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