great questions -- out of town atm, but will get to these tomorrow
Elite Trader School
- Thread starter longandshort
- Start date
I didn't start running my existing long/short strategy full-time until 2020. Pre-that time I was closer to 150/50 (a ton more beta!).
1) As you run beta neutral ptf I'm wondering how your ptf fared in Q4 2018 and Q1 2020? A picture may be worth thousand words.
This was performance through 2H of 2018... I was not super tight on beta:
Full year unlevered return...again, sloppy
First half of 2020:
2) What is your average ptf leverage and what it was during those two periods?
Pre-2020 my gross averaged 1.5x (it now averages closer to 5x due to being more market/factor neutral). I use VIX to set gross and beta ranges-- through Q4 I ended up being closer to 1.2x (I increased short positions dramatically).
For the first half of 2020, I degrossed at the end of January (went from 1.5x at start of the year to about 1). This was primarily the result of VIX spiking up. Generally, my view is that volatility tends to cluster, so I am slow to add back gross until I understand what's going on. In this case, I didn't gross up until May and still kept it fairly low.
3) Did your broker force you to decrease your ptf leverage during those two periods?
I tie my gross to a function of beta exposure I desire plus VIX. The idea is to give yourself room to maneuver. For example, if I'm 100/50, and my longs take a hit, I can quickly move up to 100/70. If I gross up, I'll move to 150/50 or 170/70. If I need to be neutral, I can shift weights to 100/100.
4) How do you manage your ptf risk wise during calm markets (low vol regime) and distressed markets (high vol regime)?
By managing the beta exposure of my portfolio. This means adding to shorts to decrease long beta exposure, or vice versa.
5) What do you have in your toolbox to discern whether markets are just selling off in orderly fashion or are poised for deep dive?
No perfect indicator. Generally, I like to think about markets from a "P = cf / r - g" where factors that impact those variables are diagnosed first. Secondary items are things like portfolio rebalancing, seasonality, etc. Tertiary considerations will be "technicals" (momentum, cross sectional momentum, etc.) or valuation of sectors/industries/factors.
It's kind of like driving a car through fog. You don't speed up when your visibility drops (slow down and degross initially). And you don't focus on patterns in the fog to guide you. Instead, you need to think about where you are going (and the approximate direction) and if you can see the road. As you build confidence you can increase speed, but if visibility remains low, I would probably avoiding maxing risk.
Same thing goes for the markets. When there's a high degree of uncertainty about CF, r, or g, then the market volatility will persist. If there is clarity around the variables then the market will drift in that direction.
6) As you run beta neutral ptf I'd think you try pinning beta at around 0 be it levered or unlevered? If so, I'm not sure how I'm to read this: "get leverage up to where portfolio beta = ~1" Can you please elaborate?
If I go 100/100 (long/short beta weighted) then my Beta should be 0. I can lever all I want, but beta is still going to be tiny or 0, and at some point I become exposed to tail risk events. If I am 120/100, then I can lever up 5x to give myself equivalent standard deviation of 1 beta.
7) You also mentioned "fancy risk management software"? Was that a private in-house developed software solution or a commercial product that your employer/IBD licensed?
I used to use Aladdin (Blackrock) and currently use Bloomberg to run/manage risk. IBKR has some useful tools for risk management, but it does not currently support factors or "risk models". This means that if you use Risk Navigator on IBKR, you just get your risk to SPX.
8) You said that if you open a position and price moves against you by a certain pre-determined amount that you reduce size. What do you do about size if price moves back to your entry price? Do you add back to your position?
This is contextual and I'm not always right. But if you think about a stock and have isolated the 3-6 critical factors, and yet the stock is still moving against you, then it may mean you missed something. If your alpha signals (for example, revisions) start to pick up, then it might make sense to reenter. But you should generally avoid making decisions based upon price.
9) I assume you add to winning positions. How do you manage position size of your winners? Say, you open a position that moves to a profit, you add size but then it drops to your entry price. Now what?
There are a couple of ways to deal with with problem (that of optimizing positions). Generally, I have "bands" of sizes that I use to manage positions. Entry/opening positions start at 2% (new ideas) and work up to 8% (best ideas). I manage size drift in 0.50% intervals.
If I open a position at 2% because I think the company will beat earnings, and next week data comes out that I believe will lead to positive revisions, then I'll increase my weight (go from 2% to maybe 4% if the opportunity is that great). I don't mind that much what the stock price does in between the catalysts I trade or watch for. I expect a degree of drift, which is why I need my expected returns to be (at min) 2x the std of the ticker.
10) When you reduce/add to position size you do it on both legs of a pair to keep it beta neutral, right?
Most of my trades are "pairs" so yes, but I do also have "single legged" trades (e.g. a long position, or a short position, without a direct offsetting pair). When I trim a long position I need to consider how that will change my portfolio beta, factor positioning, etc.
11) You certainly mimic convexity when adding/reducing position size. Do you use different convexity "function" for reducing size of losers than adding to size of winners?
It's the same concept, except that I don't in actually "add to winners" in the classical sense. If a stock is up but my conviction hasn't changed, then I do not increase the weight in my portfolio. However, if conviction and stock is up, I add to weight, which generates convexity.
13) What is your long-term win/loss rate of your pair trades?
~60%.
14) What do you do if you've found a good candidate stock for long leg but cannot find a suitable peer stock for short leg? Would you consider using sector ETF or even broad market ETF as hedge (short leg)? If so, I'd assume you also may do it the other way, i.e. you've found a good stock to go short but you cannot find a good peer stock to go long, so you'd use sector ETF or market ETF as long leg, correct?
I hate to do this, but sometimes yes. I'd say about 25% of the time, especially if it is a very short-term catalyst.
15) What category do you mainly select stocks from? Large-mid-small cap, growth-value, which industry/sector? Do you confine yourself to a particular index e.g. Russell 3000 or the world is your oyster?
I have a unique universe that's part of my edge. Simply put, I start with a short list of 10-15 companies and cover them extensively (up and down value chain, competitors, etc.). That set of 10-15 transforms into 150-200 potential targets. I benchmark vs SPX since I do take a beta view.
16) You suggest that we rookies should start out by finding an industry of our interest/expertise and keep around 10-25 stocks on our shortlist and cover them in great details. How many stocks do you and your team cover in details?
Yep I'd say even less actually. If you can cover 3-5 stocks (their peers, up and down the value chain, etc.) then you will develop edges due to the slow diffusion of information, logistical/liquidity premias, and others. My universe is about ~200 stocks, but I really only focus my coverage on 10-15 names.
17) Clearly, earnings and more importantly future earnings(analysts revisions, company guidance) are the biggest driver of price momentum. Would you share with us what you consider the second/third most important driver of price momentum?
Rates. Go back to P = cf / r - g. If r shrinks, then P will increase even if CF and G remains the same.
18) How do you uncover insti buying/selling? I can think of the Form 13 and block trades. Can you tell if a block trade happend in a dark pool or lit exchange?
This is actually quite hard to do...generally you can only do this with more long-term investors who maintain positions for 1-3+ years. For quarterly trading funds, very hard to know what their exposure is. The work I do is mainly qualitative (talking to friends on the street, speaking to fund managers to learn about their process and would incentivize them to change positions, etc.) in this space, since there is no "firm level" digital signature.
19) I'm struggling with estimating of "expected return". Could you please elaborate on your thought process to arrive at a reasonable number?
Expected return is "price target / current price - 1" (for pct chg).
This is quite hard to do in real life -- I build a 3 statement model with revenue drivers and then roll them into valuation scenarios. In the most basic model, chg to EPS = chg to stock price (assuming multiple remains the same). If you need help figuring this stuff out, I'd recommend going through some financial training workshop.
20) I had a look at the spread sheet that you shared with the ET community under this link: https://docs.google.com/spreadsheet...ZUHeRmjE6N8/pubhtml/sheet?headers=false&gid=0
I cannot figure out what the Duration column represents and how to come up with the number?
Duration stands for how long you plan to be in the position for. For example, if company A has earnings next week (7 days) then you'd put 7 for duration.
21) Which equity research companies and/or equity research analysts do you find most impactful?
It's different for each company. I read equity research to understand what the street thinks about a company and to learn what assumptions and information they are using to base their judgement on. Normally when you first cover a stock, your view will be 100% aligned with consensus (or a "good" analyst, good being subjective to your preference). However, once you have the model built, you can begin to apply new information and see how analysts respond to it. This is what your typical quarterly trading hedge fund does (MLP, Balyasny, P72, etc.).
22) Could you share with as a sample of good and bad equity research paper and point out what makes the good research paper good?
Good equity research explains the analysts thought process so you can break it apart and see where you agree or disagree.
This is good:
The analyst here explains what's driving his view.
This is not so good:
Analyst tells us his targets are rising but doesn't explain why.
23) You mentioned that you spend $7k+/mo on research and data. I assume that $2k off of your monthly budget is BBG terminal. I'm wondering what else you find worth spending your money on? I did take note you recommend Refinitv Xenith for newbie retail investors.
Expert networks (like tegus), research hubs (like alpha sense), data terminals (bloomberg, cap iq, refinitiv eikon, IHS markit), data uploaders, etc. I also buy some special alternative data that marginally enhances consensus estimates. Then there's journals, trade orgs, etc. This does not include equity research costs.
24) Do you find any value in paying for services like Estimize, which claim to have more accurate estimate of forward earnings/revenues than the industry consensus?
I do pay for estimize but I'm not sure I find much value in it. Data is too iffy -- Refinitiv's SmartEstimate is much better.
25) Would you expect exotic equity market places that are not in spotlight of global investors to be somewhat less efficient in pricing of listed local companies, e.g. eastern european equities? If so, what equity metrics and/or market microstructure properties would you look at? Take a wild guess here.
Absolutely. Generally, more exotic places means less liquidity and less volumes, so searching for price anomalies driven by those factors should be helpful. You also might find it easier to develop an edge because fewer larger investors means prices are less efficient, you can assume that if you have a very high investment skillset that others in that region might not, etc.
26) You claim to achieve ~60% win/loss ratio. What long-term win/loss ratio is considered excellent within equity HF industry?
27) Where do you see room for further improvements of your strategy and skills (stock selection, ptf/risk management, trade execution, etc.)?
28) You seem to hold your positions even during market sell-offs.
Aren't you tempted to close your positions during sell-offs, wait for markets to reprice and start over again?
29) You say that you adjust beta of your ptf depending on market conditions (low vol regime => increase ptf beta X high vol regime => decrease ptf beta).
a) How far are you comfortable to push your ptf beta in calm markets?
b) What VIX range do you personally consider "calm markets"?
c) What VIX range do you consider bordering for you to start scaling back from beta positive ptf to beta neutral ptf?
30) As HFs are required to file a Form 13-F that discloses the hedge fund's holdings I'm wondering if there is any "alpha value left" in analyzing/replicating/cherrypicking of these forms? Are there any successful HFs that base off their strategy of copycating other successful HFs?
31) What is your take on the fact that AUM of actively managed funds is in long-term decline while passive investing is in ascent? I read articles in mainstream financial media for over a decade that HF industry as a whole is underperforming main indexes and this's supposed to be contributing factor of the decline? Would you agree that most HFs underperform their benchmarks and future of most HFs is not bright?
32) Assuming the above is true I wonder why there are still people willing to invest with HFs? Who are typical HFs clients these days and what are their expectations/motivations? Generally, are those expectations met?
33) If you were to invest with HF what due dilligence would you do and what performance metrics would you review? Also, what should be minimum HF performance in order for you to invest with it?
34) What HF managers do you look up to or admire, and why? You mentioned Cohen and Soros for their performace and consistency. These two are well known figures, are there others perhaps less known managers overlooked by media who are as good as these two or even better?
35) What would rank a HF manager as excellent in terms of performance metrics (sharpe, returns, etc.)?
36) Is it difficult for a HF manager who has long-term verifiable track record to raise capital (10+ years profitable, sharpe 2.5+, unlevered returns 7%+ at 0 beta)?
37) How an aspiring HF manager should go about creating verifiable track record? Would websites like Collective2 and/or FundSeeker help?
38) Have you considered running your strategy at Collective2 and/or FundSeeder? Do you know of other similar websites?
27) Where do you see room for further improvements of your strategy and skills (stock selection, ptf/risk management, trade execution, etc.)?
28) You seem to hold your positions even during market sell-offs.
Aren't you tempted to close your positions during sell-offs, wait for markets to reprice and start over again?
29) You say that you adjust beta of your ptf depending on market conditions (low vol regime => increase ptf beta X high vol regime => decrease ptf beta).
a) How far are you comfortable to push your ptf beta in calm markets?
b) What VIX range do you personally consider "calm markets"?
c) What VIX range do you consider bordering for you to start scaling back from beta positive ptf to beta neutral ptf?
30) As HFs are required to file a Form 13-F that discloses the hedge fund's holdings I'm wondering if there is any "alpha value left" in analyzing/replicating/cherrypicking of these forms? Are there any successful HFs that base off their strategy of copycating other successful HFs?
31) What is your take on the fact that AUM of actively managed funds is in long-term decline while passive investing is in ascent? I read articles in mainstream financial media for over a decade that HF industry as a whole is underperforming main indexes and this's supposed to be contributing factor of the decline? Would you agree that most HFs underperform their benchmarks and future of most HFs is not bright?
32) Assuming the above is true I wonder why there are still people willing to invest with HFs? Who are typical HFs clients these days and what are their expectations/motivations? Generally, are those expectations met?
33) If you were to invest with HF what due dilligence would you do and what performance metrics would you review? Also, what should be minimum HF performance in order for you to invest with it?
34) What HF managers do you look up to or admire, and why? You mentioned Cohen and Soros for their performace and consistency. These two are well known figures, are there others perhaps less known managers overlooked by media who are as good as these two or even better?
35) What would rank a HF manager as excellent in terms of performance metrics (sharpe, returns, etc.)?
36) Is it difficult for a HF manager who has long-term verifiable track record to raise capital (10+ years profitable, sharpe 2.5+, unlevered returns 7%+ at 0 beta)?
37) How an aspiring HF manager should go about creating verifiable track record? Would websites like Collective2 and/or FundSeeker help?
38) Have you considered running your strategy at Collective2 and/or FundSeeder? Do you know of other similar websites?
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26) You claim to achieve ~60% win/loss ratio. What long-term win/loss ratio is considered excellent within equity HF industry?
Depends on the strategy. I would consider my w/l as "competitive" in the strategy I run. Generally, the longer-time frame, the higher the w/l should be. HFTs have a win rate of 51-55%, long/short quarterlies are 55-65%, and your longer-term investors have win rates of 65%+.
27) Where do you see room for further improvements of your strategy and skills (stock selection, ptf/risk management, trade execution, etc.)?
Process and research management. Ideally, the kind of strategy I run would utilize multiple PMs and a dozen or so analysts to reach full potential.
28) You seem to hold your positions even during market sell-offs.
Aren't you tempted to close your positions during sell-offs, wait for markets to reprice and start over again?
If I'm long A and short B, then a market sell off won't really impact my portfolio pnl much. The concept of long/short trading is to (at minimum) remove (or manage) the market factor.
29) You say that you adjust beta of your ptf depending on market conditions (low vol regime => increase ptf beta X high vol regime => decrease ptf beta).
a) How far are you comfortable to push your ptf beta in calm markets?
b) What VIX range do you personally consider "calm markets"?
c) What VIX range do you consider bordering for you to start scaling back from beta positive ptf to beta neutral ptf?
Short-hand, long-term average standard deviation of equity markets should represent the range of prices on average, given an efficient market. You can then breakup history into periods of high/low vol regimes, which typically are driven by macro catalysts (looming recession, Fed policy blunder, major macro shock, etc.), and find out how those general categories of risk events find resolution (data or sentiment change, etc.). IV tends to be higher than RV, by the variance risk premia, so that is something to overlay.
When markets are in a low vols regime, I am ok with grossing up to 5-6x. There are no "set" targets or changes in VIX that translate into a % change in gross, but a material move in VIX (or VIX9D) will have me cutting size. If VIX were to go from 16 to 18, I would first seek to trim excess beta, and then begin to cut gross from 5 down to say 3.5 or 4x. The initial assumption is that VIX will cluster, so I degross first and then dig in/analyze situation after.
If VIX rises by 50% and I cut my size by 25%, the impact to PnL vol is theoretically negligible.
30) As HFs are required to file a Form 13-F that discloses the hedge fund's holdings I'm wondering if there is any "alpha value left" in analyzing/replicating/cherrypicking of these forms? Are there any successful HFs that base off their strategy of copycating other successful HFs?
HFs copy each other all the time (look up "hedge fund hotels") which leads to crowded trades and, eventually, big crashes at the micro level (stock by stock basis). I think that there is still value in reviewing who is positioned in a company you are looking at, but I wouldn't start with 13-Fs for trade ideas.
31) What is your take on the fact that AUM of actively managed funds is in long-term decline while passive investing is in ascent? I read articles in mainstream financial media for over a decade that HF industry as a whole is underperforming main indexes and this's supposed to be contributing factor of the decline? Would you agree that most HFs underperform their benchmarks and future of most HFs is not bright?
Agree 100%. There are a lot of hedge funds that are charging for beta. If your pnl comes from market timing, that is still beta (which most people do not understand!). Very few funds have alpha, which is why the HF industry is extremely top-heavy, and investors are willing to pay very high fees to access the best funds.
32) Assuming the above is true I wonder why there are still people willing to invest with HFs? Who are typical HFs clients these days and what are their expectations/motivations? Generally, are those expectations met?
Generally, hedge fund investors are institutional investors who are seeking a non-correlated source of absolute returns. They do not invest in hedge funds to "get rich", so to speak. If they want to "get rich", they'll invest in PE and VC funds, because those are levered beta or right-tail risk assets. For the most part, hedge fund investors in top quartile funds are satisfied. However, considering that most hedge funds don't add alpha, investors in those funds are probably (and rightly so) disappointed.
33) If you were to invest with HF what due dilligence would you do and what performance metrics would you review? Also, what should be minimum HF performance in order for you to invest with it?
Depends on the size and track record of the fund. I'd want to understand the investment philosophy/approach, whether the fund is generating absolute returns, and if they have a strong operational system (with internal checks and balances). I'm less likely to invest with a guy operating out of his bedroom even if he 100x'd his account, and more likely to invest in a fund that is consistently pulling ~6% absolute returns on an unlevered basis.
34) What HF managers do you look up to or admire, and why? You mentioned Cohen and Soros for their performace and consistency. These two are well known figures, are there others perhaps less known managers overlooked by media who are as good as these two or even better?
Daniel Sundheim, Bill Ackman, Carl Icahn, Mike & Jeremy Kahan, Ole Halvorsen, Chase Coleman, etc. are all great examples of fund managers who have sources of alpha and run a tight ship.
35) What would rank a HF manager as excellent in terms of performance metrics (sharpe, returns, etc.)?
Depends on the strategy. On an absolute return basis, you'd want to see a sharpe ratio >1.5, with very low market correlation. After that, returns matter.
36) Is it difficult for a HF manager who has long-term verifiable track record to raise capital (10+ years profitable, sharpe 2.5+, unlevered returns 7%+ at 0 beta)?
Nope. It's not very easy, but they could initially start with MLP, P72, Baly, or Citadel and then launch their own fund after 1-2 years.
37) How an aspiring HF manager should go about creating verifiable track record? Would websites like Collective2 and/or FundSeeker help?
Probably not. If you don't have a HF background, the best suggestion is to pay for a firm to audit your trading account, and to try run the operations of your research/trading as pristinely as possible. Write internal (or external) memos on market conditions, trading ideas, and monthly/quarterly reviews to build context. Make sure you have the right licenses in place too. Once you have done this for some time, you'd probably want to target HNWIs by meeting and speaking with wealth managers and investment advisers.
38) Have you considered running your strategy at Collective2 and/or FundSeeder? Do you know of other similar websites?
Nope. I setup accounts there just to learn about them, but those platforms are not suitable for 1) my trading style and 2) the kinds of investors I would want to target. When you have a good investment business, you want to make sure that you have investors who will be partners in your growth and will support you.
Would you mind elaborating on this? Are you saying that alpha only can come from superior analysis/information, otherwise it's just luck? Isn't timing a very big part of trading even if you have the right analysis (market staying irrational ...)?
How do you deal with periods when everything just goes up? Do you just reduce short exposures?
Have you had situations/periods when your longs go down and your shorts go up? How do you deal with such situations?
Could you please explain where you think your edge comes from? Is it your analysis that is better than the street? Or is it that you can see the discrepancy between what the street is pricing in(the story they paint) vs. what your analysis shows and you fade that?
Thanks!
Really good questions. I want to preface my response by saying that there’s no monopoly on truth and that I hope my answers reflect the humility of a student of the markets. To your questions now…
Timing itself not “excess returns” of the benchmark. E.g. if you bought the dip then you’re still getting the returns of the asset and your performance isn’t superior to anyone else who also bought the dip. That’s not to say that beta timing isn’t profitable — it is, it’s just not alpha, defined as excess returns (over the benchmark through the same period of time).
I have a degree of flexibility on my beta exposure but typically don’t exceed 0.20 beta. The returns that I seek don’t exclusively come from the market, and usually come from a spread between certain characteristics that generate excess returns (alpha). The underlying source of alpha can be 3-8%, and I use leverage, size, and timing to increase that. I also try to time beta but don’t confuse it with alpha.
The general strategy is focused on a few drivers of excess returns, with a workflow/process that tries to enhance it. Wall Street analysts provide their research to a wide variety of investors and traders, and so they will know more about a stock than I will. However, if I replicate their analysis, I can react quicker to new material information (which drives a source of alpha returns I seek). One of the sources of alpha has a time horizon of 5-10 days, and the other about 20 days, but both can create momentum that lasts for 60-120 days.
39) >>Was up nearly 10% in q1 with a sharpe of 2.
How is your l/s equity ptf doing given recent market gyrations? Would you share a screenshot with us for 2022?
40) >>I generate absolute unlevered returns averaging high single digits targeting a market beta of 0 and a 2.5+ Sharpe ratio.
In your earlier post you claim to average sharpe of 2.5+. How do you explain slightly lower sharpe of 2 for q1 2022? Don't get me wrong, I'm not mocking you, sharpe of 2 is excellent!
41) >>This q has been ok, fairly flat for me so far, but I expect things to pick up around June
Why June? Do you expect that start of next round of earnings will cause drift in factors that you trade? And/or do you expect changes in macro backdrop during June which should affect your factors?
42) >>and have been bottom fishing tech (semis and enterprise).
I presume "semis" means semi-conductors but what do you mean by "enterprise"?
43) You said prior year 2020 you ran your l/s equity ptf with a lot more beta than now.
I'm wondering why you did that as opposed to being more beta neutral?
Did you have a macro view that supported this decision or was it just "experiment"?
Were your catalysts and/or factors you traded pre-2020 different than now?
44) Having read your posts you seem to put a lot of emphasis on macro so I'm wondering if you run macro ptf along side of your l/s equity ptf?
45) Do you find trading macro more difficult than equities? What is consensus on this within HF industry?
46) When you are "developing" a macro view do you tend to align with the street consensus view or you always think for yourself?
47) What do you think of macro research of bulge bracket macro analysts in terms of quality and actionability?
48) Generally speaking, do you find CapEx demand to be less sensitive to economic cycle than consumer/retail demand?
49) Generally speaking, do you agree when firm reduces capital expenditures that this tends to improve firm's short term earnings but may impair future/long-term growth and earnings as such firm isn't investing into asset renewal and r&d?
50) I believe that from deeply fundamental point of view free cash flow is more indicative of a company "well-being"than earnings but markets seem to be paying more attention to earnings. Why is it so?
51) As earnings and guidances are released four times a year and takes about a month until majority of companies report that means there are about two months without major micro catalysts every quarter. Do you see this seasonal pattern in your pnl? In other words do you generate most of your pnl during high earnings season?
52) What service in your opinion is the best value (price/quality) when it comes to equity research?
53) What gives you the best bang for a bug of all research products/services you regularly pay for aside of BBG terminal?
54) Do you find AlphaSense critical to your research? If you didn't use this service would it impact your pnl?
56) Could you briefly outline what would be the best path for an individual outside of the industry to monetize his own equity research assuming such individual would be highly motivated and talented?
57) Even though I haven't looked around yet I bet there must be good amount of smaller shops/entities that provide niche equity research, right? Assuming they provide high quality research with good signal/noise ratio how much they typically charge per report/trade idea?
Who would be their typical clients buy-side or sell-side or someone else? Do you think this is lucrative market to be in or this is tough business with fierce competition and profits/margins under pressure?
58) If one is to research a company and create a research report is it neccesary to tailor such report based upon whether the target customer is buy-side or sell-side? If so, what would be the key differences?
59) You said that even though you run l/s beta neutral ptf you tend to tilt your ptf beta from zero to slightly positive when markets are trading in low vol regime with bullish bias. I'm wondering if you also tilt your ptf beta to slightly negative if markets are in higher vol bearish regime?
60) Do you examine cointegration/correlation characteristics of each leg of a pair before opening a new position?
61) What reasons make you rebalance your ptf? I can come up with the following:
- when a position in your ptf exceeds certain weghting threshold
- when you add/cut size upon increase/decrease in conviction of your thesis
- change in beta coefficients
62) How often do you "crunch numbers" to see if you need to rebalance your ptf (daily/weekly)?
63) Can you elaborate what lookback period you use to calculate beta coefficients for a particular l/s pair?
64) When you are researching a stock for short leg do you consider short interest and cost of borrowing?
65) How many l/s pairs do you typically have in your l/s equity ptf?
66) How long do you on average hold positions in your l/s equity ptf?
67) Do you have a hard time limit to close your position if it does not start performing within certain number of days (e.g. it's trading sideways)?
68) Do you strive to be fully invested or you always keep some cash on-hands for whatever reasons (spare cash for new trade ideas, clients redemptions, etc.)?
69) See question 14.
>> me: you've found a good stock to go short but you cannot find a good peer stock to go long, so you'd use sector ETF or market ETF as long leg, correct?
>> l/s: I hate to do this, but sometimes yes. I'd say about 25% of the time, especially if it is a very short-term catalyst.
Why do you hate doing it this way? Is it that if you hedge with broad market ETF or sector ETF you are not generating alpha with capital allocated to ETF positions?
70) Which factors would you recommend to rookies to start with?
71) Do you suggest trading the same factors with opposite dynamics on both legs of a l/s pair? Or is it better choosing different factors for each leg of a l/s pair with prospect of them drifting apart?
72) How do you respond if you hold a position in a company and the following news hit the wire:
- the company postponed earnings announcement. Do you tend to read this that earnings may be worse than expected?
- the company announced unexpected change of CEO
- the company is taking part in M&A
- the company announced stock split
Either of these events may cause price of stock to move substantially and may catch you on the wrong side of the market.
73) >>Use tight risk management on mean reverting trades, and looser risk management on trend following trades
Can you briefly outline how a market pro would approach designing tight risk management on mean reverting trades vs loose risk management on trend following trades?
74) >> xxx: You mean the stock market doesn't care about interest rates or what the fed does?
>> l/s: The stock market does care because relative interest rates impact gdp growth and corporate profits.
What do you mean by relative interest rates in this context?
75) Can you help me clarify this formula "P=cf/r-g" you posted in question #5 and #17 above? I assume the formula is meant to be used in this manner cf/(r-g) and not (cf/r)-g, correct? What are individual components?
P - price
cf - cash flow
r - interest rates, correct? - Which bond tenure do you tend to use (10-year)? Nominal or real yield? Do you use different tenure for growth and value stocks?
g - I'm not sure here. Do you mean GDP growth rate? If, so do you mean real or nominal?
76) Sharpe vs Sortino
- I'm wondering if within HF industry is one preferred/superior over the other? If so, why?
- Does usage of one or the other varies with HF strategy (macro, long-bias equity, market neutral long-short equity, CTA trend following)?
- As both can be gamed (e.g. using monthly returns as opposed to daily returns) I'm wondering what is within HF industry considered sound/honest practice of calculating these metrics?
- Some retail punters tend to favor sortino as it disregards volatility on the up-side and volatility on the up-side is considered by retail traders a good thing. Your thoughts?
77) If trader wants to reduce transaction costs and execute order quickly he can place limit order close to or at best bid/ask hoping order will get hit thus saving bid/ask spread. Doing so many times over long period of time (think of law of large numbers) I'm not sure whether limit orders will be hit more often by random or informed orderflow? If the latter is true then limit orders are adversely selected by informed orderflow and I'm wondering whether there is actually a net positive financial effect for a trader?
78) Do you think that ascent of passive investing makes markets less efficient because passive investors' capital is not effectively allocated? If so, then there should be more and more opportunities for stockpicking going forward, right?
How is your l/s equity ptf doing given recent market gyrations? Would you share a screenshot with us for 2022?
40) >>I generate absolute unlevered returns averaging high single digits targeting a market beta of 0 and a 2.5+ Sharpe ratio.
In your earlier post you claim to average sharpe of 2.5+. How do you explain slightly lower sharpe of 2 for q1 2022? Don't get me wrong, I'm not mocking you, sharpe of 2 is excellent!
41) >>This q has been ok, fairly flat for me so far, but I expect things to pick up around June
Why June? Do you expect that start of next round of earnings will cause drift in factors that you trade? And/or do you expect changes in macro backdrop during June which should affect your factors?
42) >>and have been bottom fishing tech (semis and enterprise).
I presume "semis" means semi-conductors but what do you mean by "enterprise"?
43) You said prior year 2020 you ran your l/s equity ptf with a lot more beta than now.
I'm wondering why you did that as opposed to being more beta neutral?
Did you have a macro view that supported this decision or was it just "experiment"?
Were your catalysts and/or factors you traded pre-2020 different than now?
44) Having read your posts you seem to put a lot of emphasis on macro so I'm wondering if you run macro ptf along side of your l/s equity ptf?
45) Do you find trading macro more difficult than equities? What is consensus on this within HF industry?
46) When you are "developing" a macro view do you tend to align with the street consensus view or you always think for yourself?
47) What do you think of macro research of bulge bracket macro analysts in terms of quality and actionability?
48) Generally speaking, do you find CapEx demand to be less sensitive to economic cycle than consumer/retail demand?
49) Generally speaking, do you agree when firm reduces capital expenditures that this tends to improve firm's short term earnings but may impair future/long-term growth and earnings as such firm isn't investing into asset renewal and r&d?
50) I believe that from deeply fundamental point of view free cash flow is more indicative of a company "well-being"than earnings but markets seem to be paying more attention to earnings. Why is it so?
51) As earnings and guidances are released four times a year and takes about a month until majority of companies report that means there are about two months without major micro catalysts every quarter. Do you see this seasonal pattern in your pnl? In other words do you generate most of your pnl during high earnings season?
52) What service in your opinion is the best value (price/quality) when it comes to equity research?
53) What gives you the best bang for a bug of all research products/services you regularly pay for aside of BBG terminal?
54) Do you find AlphaSense critical to your research? If you didn't use this service would it impact your pnl?
56) Could you briefly outline what would be the best path for an individual outside of the industry to monetize his own equity research assuming such individual would be highly motivated and talented?
57) Even though I haven't looked around yet I bet there must be good amount of smaller shops/entities that provide niche equity research, right? Assuming they provide high quality research with good signal/noise ratio how much they typically charge per report/trade idea?
Who would be their typical clients buy-side or sell-side or someone else? Do you think this is lucrative market to be in or this is tough business with fierce competition and profits/margins under pressure?
58) If one is to research a company and create a research report is it neccesary to tailor such report based upon whether the target customer is buy-side or sell-side? If so, what would be the key differences?
59) You said that even though you run l/s beta neutral ptf you tend to tilt your ptf beta from zero to slightly positive when markets are trading in low vol regime with bullish bias. I'm wondering if you also tilt your ptf beta to slightly negative if markets are in higher vol bearish regime?
60) Do you examine cointegration/correlation characteristics of each leg of a pair before opening a new position?
61) What reasons make you rebalance your ptf? I can come up with the following:
- when a position in your ptf exceeds certain weghting threshold
- when you add/cut size upon increase/decrease in conviction of your thesis
- change in beta coefficients
62) How often do you "crunch numbers" to see if you need to rebalance your ptf (daily/weekly)?
63) Can you elaborate what lookback period you use to calculate beta coefficients for a particular l/s pair?
64) When you are researching a stock for short leg do you consider short interest and cost of borrowing?
65) How many l/s pairs do you typically have in your l/s equity ptf?
66) How long do you on average hold positions in your l/s equity ptf?
67) Do you have a hard time limit to close your position if it does not start performing within certain number of days (e.g. it's trading sideways)?
68) Do you strive to be fully invested or you always keep some cash on-hands for whatever reasons (spare cash for new trade ideas, clients redemptions, etc.)?
69) See question 14.
>> me: you've found a good stock to go short but you cannot find a good peer stock to go long, so you'd use sector ETF or market ETF as long leg, correct?
>> l/s: I hate to do this, but sometimes yes. I'd say about 25% of the time, especially if it is a very short-term catalyst.
Why do you hate doing it this way? Is it that if you hedge with broad market ETF or sector ETF you are not generating alpha with capital allocated to ETF positions?
70) Which factors would you recommend to rookies to start with?
71) Do you suggest trading the same factors with opposite dynamics on both legs of a l/s pair? Or is it better choosing different factors for each leg of a l/s pair with prospect of them drifting apart?
72) How do you respond if you hold a position in a company and the following news hit the wire:
- the company postponed earnings announcement. Do you tend to read this that earnings may be worse than expected?
- the company announced unexpected change of CEO
- the company is taking part in M&A
- the company announced stock split
Either of these events may cause price of stock to move substantially and may catch you on the wrong side of the market.
73) >>Use tight risk management on mean reverting trades, and looser risk management on trend following trades
Can you briefly outline how a market pro would approach designing tight risk management on mean reverting trades vs loose risk management on trend following trades?
74) >> xxx: You mean the stock market doesn't care about interest rates or what the fed does?
>> l/s: The stock market does care because relative interest rates impact gdp growth and corporate profits.
What do you mean by relative interest rates in this context?
75) Can you help me clarify this formula "P=cf/r-g" you posted in question #5 and #17 above? I assume the formula is meant to be used in this manner cf/(r-g) and not (cf/r)-g, correct? What are individual components?
P - price
cf - cash flow
r - interest rates, correct? - Which bond tenure do you tend to use (10-year)? Nominal or real yield? Do you use different tenure for growth and value stocks?
g - I'm not sure here. Do you mean GDP growth rate? If, so do you mean real or nominal?
76) Sharpe vs Sortino
- I'm wondering if within HF industry is one preferred/superior over the other? If so, why?
- Does usage of one or the other varies with HF strategy (macro, long-bias equity, market neutral long-short equity, CTA trend following)?
- As both can be gamed (e.g. using monthly returns as opposed to daily returns) I'm wondering what is within HF industry considered sound/honest practice of calculating these metrics?
- Some retail punters tend to favor sortino as it disregards volatility on the up-side and volatility on the up-side is considered by retail traders a good thing. Your thoughts?
77) If trader wants to reduce transaction costs and execute order quickly he can place limit order close to or at best bid/ask hoping order will get hit thus saving bid/ask spread. Doing so many times over long period of time (think of law of large numbers) I'm not sure whether limit orders will be hit more often by random or informed orderflow? If the latter is true then limit orders are adversely selected by informed orderflow and I'm wondering whether there is actually a net positive financial effect for a trader?
78) Do you think that ascent of passive investing makes markets less efficient because passive investors' capital is not effectively allocated? If so, then there should be more and more opportunities for stockpicking going forward, right?
And that is the only true edge in trading.
Market gyrations have been tough. I did not do much in the first 4-6 weeks, but picked up trading activity in May and June.
NOTE: this is the total return of q2 which includes a global macro sleeve, which had an outsized impact on performance. Pure long-short spread was close to 0, mainly because of the roundtrip energy prices took. I took an internship with an equity derivs firm to learn more about that specific market, which limited my ability to trade single names (until June). Therefore, most of my trades in Q2 were global macro in nature.
Mainly the volatility in returns during that period.
FOMC meeting. My process is top-down, so macro drives much of my idea generation and trading. In this case, I was trading specific outcomes (FOMC meeting), and got lucky in that I quickly switched to position when the 75bp came out.
Yes, semis = semiconductors. Enterprise means cloud, cyber, analytics, etc.
I'm less confident in my outlook. We're in a period of time where it is hard to make predictions about the next 4 weeks, much less than next 3 or 6 months.
My idea generation is primarily top-down. I build a view on growth, policy, and inflation which is used to establish scenarios for rates, FX, equities, and commodities. I take the next step of applying this across risk factors (duration, distressed, quality, etc.). I then use economic indicators, with those risk factor views, to identify potential industries. From there, I build a coverage list and conduct bottoms-up analysis (review each company, analytics, etc.) for trading ideas.
Macro is sexier but harder than equities, mainly because of the nature of data and the uncertainty around events and unknowns.
I start from the street view and then explore it from there. In many cases I follow consensus, in some I don't. I generally trade when there's a divergence in views.
It's not very actionable but it is helpful. Macro analysts are like journalists -- their work ensures that the market remains, generally, informed. However, their analysis is typically superficial and doesn't delve deep enough for the kind of returns you need to seek as a professional investor.
Capex is quite cyclical -- it ties into nonresidential fixed investment in the GDP calculation. It is generally more durable than retail or consumer demand, and can be an important adversity signal.
It really depends. Good capex expands capacity and output while reducing costs. Bad capex doesn't do this. Broadly speaking, capex leans to the former -- so capex is a good signal at the macro level, but a bad signal at the micro level.
I think the market generally agrees. Most professionals use EBITDA or FCF multiples, and guidance around FCF is probably the biggest impact to revisions.
Depends on the macro regime. Generally, most of my trades are around earnings seasons (from a volume standpoint). However, PnL can actually accelerate post earnings season if the macro regime shifts or stabilizes.
To be frank, I could probably replicate my stack using google search and excel. However, I would not have the time to cover all that I do. For this, Bloomberg is probably the most useful, followed by visible alpha / alphasense, etc.
Probably alphasense. I use it to create recurring searches, cover industries, etc. It significantly speeds up my research process.
Not critical but very nice to have. I should note that Bloomberg has been improving their search and analytics tools (DSCO GO), and so Alphasense might struggle once BBG search hits parity.
Trade on it! Seriously. The only equity research worth reading is bulge bracket stuff because those analysts have direct relationships and massive budgets (for all sorts of data and tools). They are effectively paid to not trade on their research.
For an individual, the simplest way to get good at equity research is to focus on trying to generate a pnl.
There are quite a few niche and smaller shops out there, and their value-add is coverage of less known companies, primarily SMID caps (small and mid caps). There are a few sector specialists too. I occasionally read research from those people, but the value for me is only there if they previously worked in that industry and have private survey's among their ex-peers.
Sell side doesn't read research, they create it. Buy side research is mixed, but larger firms have very structured research teams which emphasis internal research over outside/third party work. I don't recommend trying to write research professionally unless you have a very distinct edge and someone is paying you to NOT trade on your ideas.
I do! Beta tilts are important because hedging is imperfect. I can also offset a beta tilt with options.
No, that is more useful for statistical arbitrage and less so for fundamental equity.
That's pretty much it. I run small marginal trades almost every day also based upon trading performance and a few signals I use for inter-period returns.
Daily...I run risk in the morning and after close, and in real-time during the day.
since my average holding period is 20-30 days, that tends to be the lookback period I use. There are a few optimization techniques you can use to help identify the right number of periods (see: BIC optimization).
Yes, in my dd I look at all the factors I know that could move a stock within a certain range. SI is a big risk. Borrowing costs are less important because I can structure the trade in options.
Industry specific -- usually around 5. Across industries -- around 8.
About a month.
Yes, typically based upon a catalyst calendar. But I also review things weekly from that standpoint ("do I want this risk?").
I try to limit my cash weight to below 5%, however, technically speaking, cash in the portfolio can be very depending on the beta spread within my port (I might be far more short than long to equal 0 beta). Also: I am rarely actually 0 beta. I strive to be within +/- 0.1 to 0.2 but on a tick by tick basis it changes. So market neutrality is more of a goal than a reality.
ETFs are lazy! And less returns.
start with value factor and momentum, as they are the most widely researched.
Use factors at the macro level. For example, you may have a view that value will outperform momentum. This means you will want to buy high value stocks and sell high momentum stocks.
Your process should aim to improve your PNL the more steps you take. if not, then stay at your level. For example (purely hypothetical):
Level 1: buy top 50% value, sell top 50% of momentum stocks (~1000 names)
Level 2: group value and momentum into industries and identify the value-gap in order to select which industries to long/short (~500 names)
Level 3: within those industries, identify companies with improving fundamental characteristics (~200 names)
etc. etc.
- mainly negative, would trim or exit the position after corroborating vs. peers and end-markets.
- mainly negative, would trim or exit after reviewing background and value-add
- depends, would run an accretive/dilutive analysis to determine if it makes sense
- mainly positive, would estimate break-up value to determine if i participate
Mean-reversion means a stock is going up and down around a central tendency. If that is the basis of your trade, your thesis is rejected if the stock breaches the range it tends to travel.
Trend following means a stock is following a general path, but you might pay closer attention to acceleration/deceleration than range.
US vs Europe vs Japan vs China etc. Money flows to where it is treated best.
Yes it's the simple gordon growth model.
r = interest rates, usually thr US 10-yr
g = long-term growth, is usually GDP + some industry excess return
I think a manager must seek truth in their performance, which means using a variety of metrics consistently.
Adverse selection is not a risk a trader takes. It's a risk a market maker takes.
To some degree yes (Indexing and Stock Price Efficiency - Qin - 2015 - Financial Management - Wiley Online Library)