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Are Hedge fund strategies really that complex?
- Thread starter magnum29464
- Start date
I honestly think strategies need not be complex. In my research I found that the most complex part is finding, measuring and understanding persistent non-random behavior in the market. After that, the trading strategy (conditions-entry-stop-exit) used to exploit (mine) that behavior is actually simple.
It's very easy to come up with a profitable simple strategy in a few minutes, and tweak it in another few minutes. The difference between such random strategy and the one you developed after going through deep research and understanding is that the former will have no edge.
Personally I have never seen a very complex system being profitable, so what do I know? Maybe there are some. But I guess the more variables are in the system the more it is prone to be overfit to historical data.
It's very easy to come up with a profitable simple strategy in a few minutes, and tweak it in another few minutes. The difference between such random strategy and the one you developed after going through deep research and understanding is that the former will have no edge.
Personally I have never seen a very complex system being profitable, so what do I know? Maybe there are some. But I guess the more variables are in the system the more it is prone to be overfit to historical data.
gee these are some tough concepts to understand....
retail traders don't have the resources, teams of brainpower or even the reason for complex strats on a small account in general.
To say though that a billion dollar hedge fund doesn't use complex strategies is nothing but ignorance and/or stupidity.
retail traders don't have the resources, teams of brainpower or even the reason for complex strats on a small account in general.
To say though that a billion dollar hedge fund doesn't use complex strategies is nothing but ignorance and/or stupidity.
hedge funds are being overgeneralized. 'Hedge funds' really come down to the manager. Here you have someone who is basically in complete control of your money. He can invest in almost anything he wants. You essentially have an agreement with ultimately 1-2 guys to do whatever they can to grow your account and protect your capital then take an incentive out of your profit.
It is down to the individual investor to do due diligence on the fund in finding out what methodologies they use and if they're proven under all conditions. Smart investors take it a step further and find out if the fund is really risk adverse by personally finding out correlations and how many various methods they have profitable.
It is down to the individual investor to do due diligence on the fund in finding out what methodologies they use and if they're proven under all conditions. Smart investors take it a step further and find out if the fund is really risk adverse by personally finding out correlations and how many various methods they have profitable.
Well, why would a hedge fund need a complex strategy. Think about moving billions of leveraged dollars around without trying to leave a foot print, or perhaps to rigorously explain a price pattern to your fellow phd peers that can come to your desk and tell that your work is crap. If my memory serves me correctly, I saw a huge multi-strat firm (Bridgewater) give a presentation where they described that type of flat meritocracy. The derivatives markets are obviously the new area for those that have superior math skills to make lots of money. From what I've heard, many of these complex strategies involve mean reversion (I'm guessing multi-vector index reversions) and perhaps inhouse factor models. If these funds are getting best of breed from IB's then why wouldn't they have models have some complexity to them. Then of course is the risk managment side, where they would have to hedge the "black swan" or other price shocks when risk-neutral strategies get killed.
As far as these quant firms getting killed, from what I have heard it's been from mean reversion models that don't mean revert and usually the developer is under pressure to compete in a flooded arena and they're trying to squeeze water out of sand. I think Andrew Lo wrote a paper demonstrating a simple mean reversion strategy that showed this phenomenon.
I'm not in this arena, this is just what I've heard working on the buy side through some networking and my own research. I guess one way to guage the trend of complexity is geneolize (probably not a word) known quantitative systems-- the turtles, demark, cointegration, donchian channels, etc.
As far as these quant firms getting killed, from what I have heard it's been from mean reversion models that don't mean revert and usually the developer is under pressure to compete in a flooded arena and they're trying to squeeze water out of sand. I think Andrew Lo wrote a paper demonstrating a simple mean reversion strategy that showed this phenomenon.
I'm not in this arena, this is just what I've heard working on the buy side through some networking and my own research. I guess one way to guage the trend of complexity is geneolize (probably not a word) known quantitative systems-- the turtles, demark, cointegration, donchian channels, etc.
In order to trade big, big money you need to employ a method that appears so complex no one can understand it. That way people will think you're a genius and give you all their money. Doesn't matter if you understand it, just remember the golden rule, "In the land of the blind the one-eyed man is king."
Watch Rogue Trader and then read about Hedge Funds that have blown up and you'll understand what I mean.
Complexity is a salesmans dream!
Watch Rogue Trader and then read about Hedge Funds that have blown up and you'll understand what I mean.
Complexity is a salesmans dream!
Quote from yoohoo:
In order to trade big, big money you need to employ a method that appears so complex no one can understand it. That way people will think you're a genius and give you all their money. Doesn't matter if you understand it, just remember the golden rule, "In the land of the blind the one-eyed man is king."
Watch Rogue Trader and then read about Hedge Funds that have blown up and you'll understand what I mean.
Complexity is a salesmans dream!
I actually agree.